Over the weekend we had the latest policy (un)move from China
The PBoC is very concerned that further rate cuts will lead to a run on the currency. And so the MLF was left unchanged. This is usually a good indication that the Loan Prime Rate (LPR) setting for the month that closely follows will also see no change. LPRs will be set tomorrow, Tuesday, 20 February 2024.
Despite the unchanged MLF chatter of a LPR cut will not go away. An article in China Financial News, a media subsidiary and Chinese Communist Party - backed PBOC newspaper says "there is still room for a decline in loan prime rates".
The piece cites:
- signals from previous statements by the PBoC
- continuous over-fulfillment of MLF (I'm not sure what this means)
- banking system liquidity is reasonably abundant
for the potential for an LPR cut. A cut to the 5 year, it say has the greater possibility.
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There is pressure in China, Premier Li Qiang is saying he wants forceful and pragmatic polices to grow the economy. A cut to the 5-year would impact mortgage rates, more stimulus for the deeply troubled property sector would be welcomed.
ps. There is precedent for an LPR cut without an MLF reduction. This occurred in May 2022 when the five-year LPR was cut by 15 basis points.
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The PBOC's Loan Prime Rate (LPR):
- Its an interest rate benchmark used in China, set by the People's Bank of China each month on the 20th.
- The LPR serves as a reference rate for banks when they determine the interest rates for (primarily new) loans issued to their customers.
- Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
- Its calculated based on the interest rates that a panel of 18 selected commercial banks in China submit daily to the PBOC.
- The panel consists of both domestic and foreign banks, with different weights assigned to each bank's contributions based on their size and importance in the Chinese financial system.
- The LPR is based on the average rates submitted by these panel banks, with the highest and lowest rates excluded to reduce volatility and manipulation. The remaining rates are then ranked, and the median rate becomes the LPR.
Current
LPR rates are:
- 3.45% for the one year
- 4.20% for the five year
Pan Gongsheng is People's Bank of China governor