CHINESE banks kept their benchmark lending rates unchanged for August, as profit margins come under pressure and policymakers focus on the health of financial institutions.
The one-year loan prime rate (LPR) will stay at 3.35 per cent and the five-year rate, a reference for long-term credit including mortgages, remains at 3.85 per cent, according to a Tuesday (Aug 20) statement from the People’s Bank of China (PBOC). The moves were in line with the forecasts of all economists surveyed by Bloomberg.
The decisions reflect a balancing act by China, after PBOC governor Pan Gongsheng said last week that authorities will avoid adopting “drastic” measures despite their determination to achieve Beijing’s growth targets for this year.
After economic growth disappointed in the second quarter, commercial lenders lowered the LPRs last month – by 10 basis points each – after the central bank trimmed a key short-term policy rate for the first time in almost a year.
Investor attention has increasingly focused on the seven-day repo rate to assess monetary policy direction. Pan signalled in June that the central bank is shifting to that tool to guide markets after years of using the medium-term lending facility.
The PBOC last week delayed until later this month the renewal of some maturing funds it offered domestic lenders via the one-year loan operation.
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Another factor keeping Chinese banks from cutting lending rates is their thin net interest margin, which stayed at a record low of 1.54 per cent as of the end of the second quarter, according to government data published earlier this month.
Previous LPR cuts often accompanied either policy rate trims or reductions to interest on deposits, as regulators try to protect banks’ profit margins. Pan last week also pledged the central bank would strike a balance between supporting growth and ensuring the health of financial institutions.
That said, more easing is likely in the cards for the Chinese economy, where domestic demand has remained stubbornly weak amid a persistent slump in the housing market. Official data released last week showed a subdued increase in retail sales while investment growth weakened.
The PBOC will accelerate the implementation of existing financial policies, study additional steps and support proactive fiscal measures, Pan said last week. It will gradually reduce its focus on quantitative targets – likely a reference to credit and money supply expansion goals – and put more emphasis on the role of price-based tools such as interest rates, he added.
High rates abroad have meant a longer wait for cheaper money in China since a wider differential in borrowing costs could accelerate capital outflows and undercut the local currency. With the US Federal Reserve on track to cut rates next month, the PBOC may soon get more leeway to ease its own policies further. BLOOMBERG
