China’s Central Bank Holds Key Rates Amid Economic Challenges. China’s central bank kept its key policy rates unchanged on Monday, indicating a likely hold on the benchmark lending rate later this month. The People’s Bank of China (PBOC) injected 182 billion yuan ($25.09 billion) into the financial system via its medium-term lending facility, maintaining an interest rate of 2.5%. Additionally, the PBOC offered CNY4 billion in funds to banks at an unchanged interest rate of 1.8%.
The decision to hold the medium-term lending rate suggests that the benchmark loan prime rate will likely remain the same as last month. The PBOC is set to release its loan prime rate on Thursday. This decision follows recent data showing that Chinese banks issued fewer loans than expected in May, signaling continued weak credit demand amid a prolonged property slump.
The hold on the key policy rate was widely anticipated due to concerns over the financial sector’s stability, as Chinese banks face narrowing profit margins. Economists argue that a policy rate cut would offer limited benefits given the weak borrowing demand from households and companies. Additionally, a weakened Chinese yuan and the significant yield gap between China and the U.S. limit Beijing’s options.
Despite these challenges, economists expect Beijing to loosen its monetary policy in the second half of the year to support the economy. Potential measures include trimming policy rates and reducing the amount of deposits banks must hold at the central bank. However, fiscal policy is expected to play a more significant role in bolstering the Chinese economy this year.
“In terms of policy support, we see an ongoing shift in government policy from monetary easing towards fiscal stimulus to bolster domestic demand,” said Serena Zhou, a senior China economist at Mizuho Securities in Hong Kong. Last month, Beijing initiated sales of the first batches of a planned CNY1 trillion in ultralong bonds, urging local governments to expedite their bond sales.
This strategic shift highlights the government’s efforts to navigate the economic challenges posed by weak credit demand and a sluggish property market. As the PBOC holds its key policy rates steady, the focus now shifts to fiscal measures aimed at stimulating domestic demand and ensuring economic stability. China’s Central Bank Holds Key Rates Amid Economic Challenges.
