China’s central bank has maintained its benchmark lending rates for the ninth consecutive month, keeping the one-year Loan Prime Rate (LPR) at 3% and the five-year LPR at 3.5%. This decision reflects a careful strategy by authorities to support a slowing economy while also managing currency stability and navigating mixed economic signals. The move was widely anticipated by market observers.
The world’s second-largest economy experienced a slowdown in the final quarter of the previous year, with GDP growth at 4.5% year-on-year, its slowest pace since the lifting of stringent COVID-19 curbs. Persistent deflationary pressures and a cautious consumer spending environment, exacerbated by a struggling real estate market and job market uncertainties, continue to pose challenges. Recent data indicated a significant drop in retail sales growth and negative GDP deflator readings for several consecutive quarters.
In response, policymakers are increasingly focusing on promoting service consumption, such as elderly care and tourism, to offset weaker demand for goods. This strategic shift aims to bolster overall spending and economic activity.
The People’s Bank of China’s decision to hold rates steady underscores a cautious monetary policy. While key policy rates and reserve requirement ratios were adjusted last year to stimulate growth, the focus has now shifted towards more targeted and structural support measures. Analysts suggest that the central bank is opting for administrative guidance and liquidity tools rather than outright rate cuts to avoid further pressure on bank margins and the yuan.
Concurrently, the Chinese yuan has shown a strengthening trend in recent months. The offshore yuan has appreciated against the U.S. dollar, partly due to global dollar weakness. The PBOC has signaled a degree of tolerance for this gradual appreciation, even adjusting its daily fixing levels. However, a stronger yuan could potentially impact China’s export competitiveness, which is already facing pressure from U.S. tariffs and global competition.
Looking ahead, economists anticipate continued fluctuations in the yuan’s exchange rate as Beijing pursues the internationalization of its currency. The central bank’s approach suggests a delicate balancing act, aiming to foster domestic economic recovery without jeopardizing currency stability or export advantages. The commitment to a proactive fiscal policy and a moderately loose monetary policy for the current year remains in place, as indicated by the Central Economic Work Conference.