China Set To Leave Lending Rates Steady, But Tariffs Raise Easing Bets

China is generally anticipated to maintain its benchmark lending rates during the monthly fixing on Monday, yet markets are betting on additional stimulus measures being implemented shortly due to a worsening Sino-U.S. trade conflict, per a Reuters survey. Policymakers must tread carefully as the yuan faces strain following U.S. President Donald Trump's barrage of tariffs, while diminishing interest margins for lenders have constrained the potential for monetary easing. The loan prime rate (LPR), typically applied to banks' top customers, is determined monthly after 20 selected commercial banks provide their suggested rates to the People's Bank of China (PBOC).

In a Reuters poll of 31 market observers carried out this week, 27, or 87 per cent of those surveyed, anticipated that both the one-year and five-year LPRs would stay unchanged, while the other four contributors forecasted a decrease of 10 to 15 basis points in the five-year rate. In China, the majority of new and significant loans are tied to the one-year LPR, whereas the five-year interest rate affects mortgage pricing. China most recently lowered its policy rate in September and adjusted benchmark LPRs in October. "A trader at a wealth management firm stated, 'I believe there won't be a cut in the LPR (this month)." "They must first reduce the deposit rates." A decrease in the banks' deposit rates could ease net interest margin strain on lenders and enable them to reduce borrowing rates.

China holds rates amid tariff uncertainty

China's gross domestic product (GDP) increased by 5.4 per cent in the first quarter, surpassing forecasts, but markets are concerned about a significant decline in the upcoming year as U.S. tariff policies represent the greatest threat to the Asian powerhouse in years. Analysts noted that export data had not yet reflected the effects of increased tariffs, as numerous factories placed their orders ahead of time to avoid the duties. Trump has increased tariffs on Chinese products to an enormous 145 per cent, leading Beijing to respond with elevated 125 per cent taxes on U.S. products in a reciprocal trade conflict that has unsettled investors. Market players continue to anticipate certain monetary easing initiatives in the upcoming months to bolster the overall economy and mitigate the effects of U.S. tariffs.

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Any efforts to enhance stimulus, nonetheless, will necessitate that policymakers take into account the effect on the yuan, which has decreased 0.4 per cent compared to the dollar since Trump's announcement of global tariffs on April 2. "To support domestic financial and property markets while advancing the international use of the yuan, Beijing is unlikely to permit a significant depreciation of the yuan against the dollar," stated Ting Lu, chief China economist at Nomura, who further said Nomura is keeping its predictions for a 50-basis-point reduction in the reserve requirement ratio (RRR) and a 15-basis-point interest rate cut in the second quarter. Nevertheless, "should U.S.-China tensions escalate significantly, resulting in considerable stock market declines, the People's Bank of China (PBOC) might swiftly react with RRR reductions to bolster market confidence, similar to the case in May 2019," Lu added.