China Freezes 'De Facto Benchmark Rate' LPR...Concerns Over Yuan Weakness (Comprehensive)

Lowest Value of Yuan in 16 Years
Focus on Exchange Rate Defense Amid Recent Economic Indicator Rebound

China's central bank has effectively frozen the Loan Prime Rate (LPR), which corresponds to the benchmark interest rate. This move aims to defend the recently weakening yuan exchange rate and prevent capital outflows.

On the 20th, the People's Bank of China announced that the 1-year LPR for September would be held steady at 3.45%, and the 5-year LPR at 4.20%. The LPR is calculated by aggregating the loan rates offered to top-tier customers by 18 designated banks. Local financial institutions use this as a benchmark for lending, making it a practical benchmark interest rate. The 1-year rate affects general loans, while the 5-year rate influences mortgage loans.

This LPR freeze was anticipated following the People's Bank of China's decision on the 15th to hold the 1-year Medium-term Lending Facility (MLF) rate steady. Typically, in China, adjustments to the MLF are followed by corresponding changes in the LPR.

Experts in both Chinese and global markets had forecasted the LPR freeze. The state-run media outlet China Economic Net surveyed market experts on the LPR, reporting that both the 1-year and 5-year LPRs were expected to remain unchanged. Wang Qing, chief macroeconomic analyst at Chinese credit rating agency Dongfang Jincheng, explained the rationale, stating, "Recently, credit loans have increased significantly, and banks are lowering first-time mortgage rates," adding, "Bank net interest margins (NIM) are also at historically low levels." Wu Maohua, an economist at China Guangda Bank, evaluated that "the rate cuts by the People's Bank of China since June have already exceeded expectations."

Major foreign media also predicted that the central bank would keep the LPR unchanged, considering the yuan's depreciation and recent economic data recovery. For the 5-year term, 90% of respondents (out of 29) expected a freeze, while three anticipated a 0.05 to 0.1 percentage point cut.

Since August, China's economic indicators have shown signs of recovery after bottoming out. In August, retail sales increased by 4.6% year-on-year, and industrial production rose by 4.5%, both significantly surpassing market expectations of around 3%.

This freeze prioritizes defending the exchange rate and preventing capital outflows by avoiding a widening interest rate gap between the U.S. and China, rather than stimulating the economy through rate cuts. On the 8th, the yuan exchange rate surged to 7.351 yuan per dollar, marking a 16-year high. The People's Bank of China has actively intervened in the exchange rate by consecutively lowering the reference rate to guide the market toward a weaker yuan.

It appears the authorities believe that previous measures have sufficiently addressed policy needs. Last month, the People's Bank of China cut the 1-year LPR by 0.1%, and on the 15th, it lowered the reserve requirement ratio for commercial banks by 0.25 percentage points to inject liquidity into the market. This reserve ratio cut is estimated to release about 500 billion yuan (approximately 92 trillion won) in liquidity. Since 2018 (when the ratio was 15%), cumulative reductions up to March this year have released a total of 11.8 trillion yuan through 15 cuts.

However, the market expects additional LPR cuts within the year. Analyst Wang Qing stated, "Given the low inflation rate, the possibility of further LPR cuts this year cannot be ruled out," adding, "If the MLF rate is cut in the fourth quarter, it could be followed by a reduction in the LPR."

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