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Sylvia Ma

Mia Nulimaimaiti

China surprised the market by leaving a mortgage-linked lending rate unchanged on Friday, despite rising calls to help revive the crisis-hit property market and also drive the national economy.
The five-year loan prime rate (LPR), which is widely used by Chinese banks as a reference for mortgage rates, remained unchanged at 3.85 per cent, the People’s Bank of China said on Friday.
China’s one-year LPR also remained unchanged at 3.35 per cent.
A survey by Reuters had expected an LPR cut, especially after the US Federal Reserve announced an interest-rate cut of half a percentage point on Wednesday, which analysts believed gave the PBOC more room to carry out easing policies amid shrinking domestic demand and a prolonged property downturn.
“It came as a surprise to me, as I expected the PBOC to follow the Fed and cut the loan prime rate by 10 basis points,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
“Latest activity data shows economic momentum is weakening, the real interest rate is quite high in China, and the exchange rate is not under pressure to depreciate, yet the PBOC prefers to keep loan prime rate unchanged.
“Nonetheless, I still expect PBOC to cut rates in the coming months, as it is necessary to address the deflationary pressure in the economy.”
Although we do expect some monetary easing over the coming quarters, it is likely to remain modest in scope
Zichun Huang, Capital Economics
Following the announcement, the onshore yuan spot rate had strengthened to 7.0536 per US dollar at 5pm on Friday, compared to Thursday’s close of 7.0660.
The cut by the US Federal Reserve had narrowed the interest rate differential between China and the US.
But Zichun Huang, China economist at Capital Economics, said the inaction by China underscored the extent to which the PBOC remained constrained by concerns about bank profitability and declining long-term bond yields.
“Although we do expect some monetary easing over the coming quarters, it is likely to remain modest in scope and insufficient to drive a turnaround in private sector demand,” Huang said.
And with the PBOC “likely to maintain its cautious approach to easing”, Huang expected a 10-basis-point reduction in policy rates in the next quarter and 20 basis points worth of reductions in 2025.
“That would be too small to significantly boost credit growth and wider economic activity, however, not least because real interest rates will remain quite restrictive given persistently low inflation,” she added.
China’s central bank said last week that it was set to “introduce incremental policy initiatives” to further reduce the costs of corporate financing and residential credit.




The national mortgage loan total stood at 37.8 trillion yuan (US$5.3 trillion) at the end of June, while new medium-term household borrowing – largely equivalent to mortgage loans – dropped by 25 per cent year on year to 120 billion yuan last month.
“Considering the current downward pressure on the macroeconomy remains generally manageable and various risks continue to be effectively controlled, [the PBOC’s] monetary policy has the condition to maintain a ‘China-based’ approach,” Golden Credit Rating said on Friday.
Ming Ming, chief economist at Citic Securities, told the state-backed Xinhua News Agency that a reduction in mortgage rates for existing loans may still be in progress.
However, “any future cuts to the LPR will likely depend on easing the strain on commercial banks’ liabilities. Deposit rates may need to come down before the LPR is adjusted”, he added.
Zou Lan, head of the PBOC’s monetary policy department, said earlier this month that there was room for China to cut the reserve requirement ratio – the amount of cash that commercial banks must hold as reserves – that would free up more liquidity at banks.
But he expressed concerns over their shrinking net interest margins, a key gauge of profitability, which he said would constrain further cuts in the deposit and lending rates by the central bank.


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China’s five-year loan prime rate remained unchanged even after the US Federal Reserve kicked off its rate-cutting cycle


China’s five-year loan prime rate remained unchanged even after the US Federal Reserve kicked off its rate-cutting cycle.


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