A man walks past the People’s Bank of China (PBOC) building on July 20, 2023 in Beijing, China. (Photo by Jiang Qiming/China News Service/VCG via Getty Images
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China on Monday kept its medium-term lending rate steady, as the country’s central bank seeks to stabilize the yuan which has come under pressure following Donald Trump’s victory in the U.S. presidential election.
The People’s Bank of China kept the medium-term lending facility rate unchanged at 2.0% on 900 billion yuan ($124.26 billion) worth of one-year loans to some financial institutions, according to the bank’s official statement.
“It is a well-expected move, given that the market liquidity [has] remained ample,” said Bruce Pang, chief economist and head of Research, Greater China at JLL, citing PBOC’s move in October that injected 500 billion yuan into the banking system.
Keeping the MLF rate intact allows for “greater policy maneuverability” given the change in U.S. administration, at a time when commercial banks’ net-interest-margins have remained tight, Pang added.
At the end of September, overall commercial bank margins dropped to 1.53%, according to official data from the national financial regulatory administration. That’s far below the 1.8% threshold that regulators reportedly see as necessary to maintain “reasonable profitability.”
The bid rates in Monday’s operation ranged from 1.90% to 2.30%, with the total MLF loans now standing at 6.239 trillion yuan, according to the central bank’s statement.
Wang Tao, chief China economist at UBS Investment Bank, estimates the MLF to remain at 2.0% this year before coming down to 1.2% at the end of 2025, and 1.0% in 2026.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, expects the PBOC to hold off more rate cuts until the new U.S. administration takes office in January, which is expected to bring higher tariffs on Chinese exports.
“The strong appreciation of US dollar has put pressure on other currencies including RMB,” he said, adding that the PBOC was not “in a hurry to cut interest rate for now.”
The offshore yuan has lost a little over 2% since the U.S. presidential election on Nov.5.
“A delayed reduction in the [MLF] lending rates” would also bolster the yuan against the stronger greenback, JLL’s Pang added.
The offshore Chinese yuan has lost about 3.3% against the dollar since Sep. 24 when Beijing started the initial round of stimulus announcements aimed at shoring up its slowing economy. The offshore yuan last traded at 7.2472 on Monday.
The central bank would “walk one step at a time to assess the policy results,” said Gary Ng, senior economist at Natixis, although China may want a weaker yuan to support exports, it will prefer “a gradual depreciation rather than a sudden shock.”
Last week, PBOC kept the 1-year and 5-year loan prime 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 acts as a benchmark for mortgage rates.
A further cut on the reserve requirement ratio for commercial lenders is more likely in the coming months, Pang said, which could aim to “balance the dual objectives of revitalizing the economy and stabilizing the exchange rate.”
PBOC Governor Pan Gongsheng had said in a closely watched meeting in November that the authorities planned to maintain supportive monetary policy and had indicated that the RRR would be lowered by 25 to 50 basis points by the year-end, depending on liquidity conditions.
He also suggested that the seven-day reverse repo rate could be cut by another 20 basis-point before the end of the year.
Unlike the Fed’s focus on a main interest rate, the PBOC uses a variety of rates to manage monetary policy.
