On July 20, 2023, a man walked past the People’s Bank of China (PBOC) building in Beijing, China. (Photo by Jiang Qiming/China News Service/VCG via Getty Images
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China kept medium-term lending rates steady on Monday as the central bank sought to stabilize the yuan, which has come under pressure after Donald Trump won the U.S. presidential election.
The People’s Bank of China kept the medium-term loan facility interest rate unchanged at 2.0% for 900 billion yuan (US$124.26 billion) of one-year loans to some financial institutions. According to the bank’s official statement.
“This is an expected move given that market liquidity remains abundant,” said Bruce Pang, chief economist and head of research for Greater China at JLL. Capital injection of 500 billion yuan in October Enter the banking system.
Pang added that in light of the changes in the U.S. government, keeping the MLF interest rate unchanged can bring “greater policy operability” while commercial banks’ net interest margins remain tight.
Official data shows that the overall profit margin of commercial banks fell to 1.53% at the end of September National Financial Administration. This is much lower than 1.8% threshold Regulators reportedly believe this is necessary to maintain “reasonable profitability”.
The central bank announced that the bid interest rate for Monday’s operation was 1.90% to 2.30%, and the current total MLF loan amount is 6.239 trillion yuan.
Wang Tao, chief China economist at UBS Investment Bank, expects MLF to remain at 2.0% this year, then drop to 1.2% at the end of 2025 and 1.0% in 2026.
Zhang Zhiwei, president and chief economist of Pinpoint Asset Management, expects the Chinese central bank to delay further interest rate cuts until the new U.S. administration takes office in January, which is expected to impose higher tariffs on Chinese exports.
“The strong appreciation of the U.S. dollar has put pressure on other currencies, including the yuan,” he said, adding that China’s central bank was “in no rush to cut interest rates at the moment.”
The offshore yuan has fallen a little more than 2% since the U.S. presidential election on November 5.
JLL’s Pang added that a “delayed reduction in MLF lending rates” would also boost the yuan’s strength against the dollar.
The offshore yuan has fallen about 3.3% against the dollar since Beijing launched the first round of stimulus measures on Sept. 24 aimed at boosting a slowing economy. The offshore yuan last traded at 7.2472 on Monday.
Gary Ng, senior economist at Natixis, said the central bank would “evaluate policy outcomes step by step” and that while China may want a weaker yuan to support exports, it would prefer “gradual devaluation rather than “Sudden depreciation”.
Last week, the central bank kept the one-year and five-year loan preferential rates unchanged at 3.1% and 3.6% respectively. The 1-year LPR affects corporate and most household loans in China, while the 5-year LPR is the benchmark for mortgage rates.
Pang said it was more likely to further reduce commercial banks’ deposit reserve ratios in the coming months, which could be aimed at “balancing the dual goals of revitalizing the economy and stabilizing the exchange rate.”
Pan Gongsheng, governor of the People’s Bank of China, said at a closely watched meeting in November that the authorities planned to maintain supportive monetary policy and said the reserve requirement ratio would be cut by 25 to 50 basis points by the end of the year, depending on liquidity conditions.
He also suggested that the reverse repurchase rate may be lowered by another 20 basis points in the seven days before the end of the year.
Unlike the Federal Reserve, which focuses on key interest rates, the People’s Bank of China uses a variety of interest rates to manage monetary policy.
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