PBOC under pressure to cut rates

Chinese banks have chosen to maintain their benchmark lending rates without any changes, despite growing calls for additional central bank measures to stimulate the country’s economic recovery. Both the one- and five-year loan prime rates (LPRs) have remained unchanged for the ninth consecutive month in May, aligning with the predictions of most economists. These rates are determined as a differential to the rate set by the People’s Bank of China (PBOC) on its one-year policy loans, which were held steady last week.

Recent economic indicators have indicated a slowdown in the recovery, leading analysts to urge for further policy intervention. In April, industrial output, retail sales, and fixed investment all experienced significantly slower growth than anticipated. Additionally, inflation reached near-zero levels, imports declined, and credit expansion fell short of expectations.

Bruce Pang, the chief economist for Greater China at Jones Lang LaSalle Inc., emphasised the need for interest rate cuts and adjustments to the reserve requirement ratio (RRR) within the current year, even as the PBOC primarily relies on targeted tools to support key sectors.

The last reduction in the RRR, which specifies the amount of cash banks must maintain in reserves, occurred in March when it was lowered by 25 basis points. Meanwhile, the rate for the PBOC’s one-year loans, provided through its medium-term lending facility, has remained unchanged since August.

Economists at Goldman Sachs Group Inc. anticipate a 25 basis-point reduction in the reserve ratio in June to bolster market sentiment and facilitate credit growth, considering the usual increase in liquidity demand towards the end of the quarter. However, they note that significant monetary or credit stimulus is unlikely due to the PBOC’s focus on managing financial risks. The recent annual financial stability report published by the PBOC highlights concerns over mounting government debt, widening regional economic disparities, and escalating tensions between the United States and China, all of which contribute to making financial stability a top priority for the central bank, according to the Goldman economists.