Chinese banks hold lending rates as yuan weakness looms

CHINESE banks maintained their lending rates for a third month, with the central bank's cautious easing measures and a weaker yuan reducing the scope for further reductions in borrowing costs.

The one-year loan prime rate (LPR) was held steady at 3.7 per cent, the People's Bank of China (PBOC) said on Wednesday (Apr 20). A slight majority of 9 of the 16 economists surveyed by Bloomberg had expected a cut. The 5-year rate, a reference for long-term loans including mortgages, was also unchanged at 4.6 per cent.

Loan prime rates are China's de facto benchmark lending costs, based on the quotes that 18 banks offer their best customers and submit to the central bank. The one-year LPR usually moves in lockstep with the PBOC's 1-year medium-term lending facility rate, which was left unchanged last week.

The scope for further easing is limited as the Federal Reserve's rate hikes fuel concerns on capital leaving China and put pressure on the yuan to depreciate. The Chinese currency trading offshore weakened on Tuesday by the most since July as US Treasury yields surged and the greenback strengthened. The PBOC set its reference rate for the yuan at a weaker level on Wednesday.

"It looks like the Fed-PBOC monetary policy divergence started to shrink the PBOC's policy room for easing," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. The Chinese central bank is reluctant to ease aggressively against the backdrop of emerging bearish sentiment for the yuan, he added.

Funds are also returning to haven assets amid risk-off sentiment due to the war in Ukraine and policy tightening by the world's major central banks. The yield on China's 10-year bonds is now about 10 basis points lower than its US peer.

Outflows from China's stocks and bonds accelerated after the Ukraine war, with March marking the first monthly net withdrawal from the A-share market since September 2020 and a record month of sovereign debt offloading.

The PBOC may prefer to use quantitative tools to provide liquidity and support growth going forward, Tommy Xie, an economist at Oversea-Chinese Banking Corp, wrote in a note on Wednesday. The bank now forecasts no change in benchmark interest rates in the second quarter, he added.

The benchmark CSI 300 Index fell as much as 1.6 per cent on Wednesday, while the technology-heavy and more liquidity sensitive ChiNext Index dropped as much as 3.7 per cent. The onshore yuan traded 0.1 per cent weaker at 6.4029 per dollar as of 2:21 pm local time.

Iris Pang, chief economist for Greater China at ING Greop, said the PBOC's actions have limited effect in boosting growth and focus should be on fiscal support. "The PBOC itself says that liquidity is ample, so it's not going to do a lot on monetary policy and that leaves more policy room for the fiscal side," she said in an interview on Bloomberg TV. "Whether banks are ready to lend is a big question mark during this time, whether banks can identify the good credit quality borrowers is a big question."

Analysts had predicted a drop in the LPRs after the central bank took several steps recently to boost liquidity and ease funding costs for lenders in a bid to spur lending and growth in the economy.

However, some economists said the measures weren't enough to give banks an incentive to lower their benchmark lending rates this month. The 25 basis-point cut in the reserve requirement ratio, or the amount of cash lenders must hold in reserve, announced earlier this month was smaller than the traditional 50 basis points and only takes effect on Apr 25, too late to impact the LPR quotes this month, according to economists including Wang Yifeng at Everbright Securities.

Attention will shift to any easing signals from the meeting of the Communist Party's Politburo, the highest-level decision-making body, traditionally scheduled at the end of April. BLOOMBERG