<중앙은행, 사실상 기준금리 동결…경기 회복세에 신중모드 (종합)> Central Bank Effectively Holds Base Rate Steady... Cautious Mode Amid Economic Recovery (Comprehensive)

5-Year Maturity Interest Rate Cut by Largest Margin Followed by Speed Adjustment
Economic Indicators Show Temporary Improvement in Jan-Feb
Real Estate Risks Remain a Concern

The People's Bank of China, the country's central bank, has entered a 'cautious mode' by keeping the de facto benchmark interest rate unchanged. This decision is interpreted as a response to the recent temporary improvement in early-year economic indicators, following last month's record-largest cut in the 5-year loan prime rate (LPR).

On the 20th, the People's Bank of China announced that it would keep the LPR unchanged at 3.95% for the 5-year term and 3.45% for the 1-year term. This aligns with market experts' expectations.

[Image source=Yonhap News]

The LPR is calculated by aggregating the loan rates offered to the best customers by 18 designated banks. Since local financial institutions base their lending rates on this, it effectively serves as the benchmark interest rate in China. The 1-year rate affects general loans, while the 5-year rate influences mortgage loans.

Previously, last month, the People's Bank of China had sharply cut the 5-year LPR from 4.20% to 3.95%, a 0.25 percentage point reduction. This was the first adjustment to the 5-year LPR in eight months since June last year, and the size of the cut was the largest since the system was introduced in 2019. It was also the first time the rate fell below 4.0%.

This decision to hold rates steady is seen as a monetary policy adjustment in response to recently released Chinese economic indicators for January and February that exceeded expectations. According to the National Bureau of Statistics of China, industrial production, which reflects manufacturing trends, increased by 7.0% year-on-year in January and February. This figure surpassed both market forecasts (5.3%) and the previous month's figure (6.8%). The growth rate was the highest in nearly two years since February 2022 (7.5%).

Domestic demand showed a relatively weaker trend but still increased by 5.5% year-on-year during the same period. Although this was below the previous month's 7.4%, it was close to market expectations (5.6%) and even exceeded some major foreign media estimates (5.0%). Notably, sales in the food service (12.5%), telecommunications equipment (16.2%), sports and leisure (11.3%), and automobile (8.7%) sectors drove overall consumption.

However, from the authorities' perspective, the risk of domino bankruptcies in the real estate sector and a slowdown in transactions remain significant concerns. Investment in the real estate sector decreased by 9.0% year-on-year in January and February. This negative investment trend has been ongoing since early 2022. The decline in housing transaction volume reached 24.8% this year.

Moreover, the industry's prospects for recovery are diminishing. The Chinese securities regulator imposed a fine of 4.175 billion yuan (approximately 774.7 billion KRW) on Chinese real estate developer Hengda (Evergrande). The penalty followed an investigation that confirmed accounting fraud involving the issuance of bonds based on inflated performance figures.

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