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Why Is China Maintaining Its Lending Criteria for Now?

by Carl Steward
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ChinaWhy Is China Maintaining Its Lending Criteria for Now?

On Monday, China maintained its benchmark lending rates for business and family loans, as predicted, despite global central banks’ rate hikes making it difficult for Beijing to decrease rates to support a lagging home economy.

Markets think Chinese officials are concerned about the possibility of the yuan depreciating and capital outflows if they pursue more monetary easing to support a COVID-19-affected economy at a time when other major nations are tightening their rate policies. The one-year loan prime rate (LPR) remained constant at 3.70 percent, while the five-year LPR remained at 4.45 percent. Stephen Innes, the managing partner at SPI Asset Management, explained that perhaps there is some hesitancy in relaxing monetary policy to stimulate economic activity. This could represent some prudence in moving opposite to other central banks, notably the Federal Reserve. However, it appears that greater liquidity injections and credit-stimulating measures are only a matter of time.

Rate Rise in Help of Economies

Following the Fed’s 75-basis-point boost to battle excessive inflation, central banks throughout Europe hiked interest rates last week, some by an amount that surprised markets. Capital Economics economists mentioned previously that the PBOC has nothing to fear from a lower currency; the renminbi is still exceptionally robust. The last thing it wants is to have to defend against a sudden, potentially destabilizing sell-off. Practically every other major central bank has become considerably more hawkish. Hence, if it dropped rates now that might plausibly happen.

Divergent Sino-US policies wiped out China’s yield edge in April; because of this, the yuan fell to a new low for the month. Furthermore, a deeper inversion of the U.S. and Chinese government-bond rates might reignite devaluation pressure on the Chinese yuan. In a poll last week, over 90% of traders and economists anticipated China to maintain both rates steady. Last month, China slashed the five-year LPR, the standard reference rate for mortgages, by an unusually large margin to boost the economy’s faltering housing industry. The one-year LPR is used for most new and ongoing loans in China.

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