China Holds Interest Rates Steady... Focus on Fiscal Expansion Policy (Update)

People's Bank of China 1- and 5-Year Loan Prime Rates (LPR) at 3.85% and 4.65%, Respectively

[Asia Economy reporters Jo Young-shin and Jung Hyun-jin] The People's Bank of China, the central bank of China, has kept the Loan Prime Rate (LPR) unchanged. On the 20th (local time), the People's Bank of China announced that the 1-year LPR rate remains at 3.85% per annum, the same as the previous month. The 5-year LPR, which affects the real estate market, was also maintained at 4.65%, unchanged from last month.

LPR is the interest rate applied by Chinese financial institutions when lending and effectively serves as a benchmark interest rate. The LPR is the average of the best loan rates reported by 18 Chinese banks and is published on the 20th of each month.

There were expectations inside and outside China that the central bank would lower interest rates ahead of the opening of the Two Sessions (Lianghui - the National People's Congress and the Chinese People's Political Consultative Conference). It was anticipated that the Xi Jinping leadership would further cut rates to stimulate the economy in response to the novel coronavirus disease (COVID-19).

There are two main interpretations regarding this decision to keep rates steady. First, the rate freeze is seen as the Chinese government taking a pace control approach. The People's Bank of China had cut rates twice before: by 0.01 percentage points (1-year term) in February and by 0.20 percentage points in April. It is interpreted that concerns about cutting rates three times within four months played a role.

Another analysis suggests that risk management in the financial market also influenced the decision. There have been concerns that an eased monetary policy could trigger instability in the financial markets.

Reflecting this, Guo Shuqing, Secretary of the Communist Party Committee of the People's Bank of China and Chairman of the China Banking and Insurance Regulatory Commission, stated that "the relationship between the goals of maintaining stable growth and employment stability and the conflicting policy objectives of preventing financial risks and restructuring must be well managed."

There is also speculation that the Chinese government is focusing more on fiscal expansion policies rather than interest rate policies, which have a greater market impact. In fact, fiscal expansion policies are becoming a foregone conclusion. On the 10th, the People's Bank of China removed the phrase "flooding the market with liquidity" (大水漫灌, da shui man guan) from its '2020 First Quarter Monetary Policy Implementation Report.' This phrase refers to supplying liquidity in large quantities to stimulate the economy.

On the 14th, Liu Kun, China's Minister of Finance, hinted at such a policy in an article for the People's Daily. He wrote, "Economic and social development is engulfed in great uncertainty, and downward pressure on the economy remains significant," and stated that the intensity of the existing proactive fiscal policy would be raised to an "even more" proactive fiscal policy.

Chinese state media also expect fiscal expansion policies such as increasing the issuance limit of government bonds and special local government bonds to be announced at the Two Sessions. The fiscal deficit ratio to GDP, which was 2.8% last year, could be raised to 3.5%. Since the Xi Jinping leadership places great importance on economic growth, the possibility of unexpected figures being presented cannot be ruled out.

This content was produced with the assistance of AI translation services.