China Holds Benchmark Interest Rate Steady... Adjusting Interest Rate Pace (Comprehensive)

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank of China, has kept the benchmark interest rate unchanged. On the 15th, the People's Bank of China froze the Medium-term Lending Facility (MLF) loan rate, while lowering the reserve requirement ratio (RRR).

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On the 20th, the People's Bank of China announced that the 1-year Loan Prime Rate (LPR) for April was recorded at 3.7%, the same as the previous month. This marks the third consecutive month of holding steady after a 0.1 percentage point cut in January. The 5-year LPR also remained unchanged at 4.6%.

Since March, as COVID-19 spread throughout China, the dominant expectation was that the Chinese government would cut interest rates to stimulate the economy. There were also predictions that Chinese financial authorities might use all three available monetary policy tools (MLF, RRR, and LPR), but this freeze suggests that the People's Bank of China is adjusting the pace of rate changes.

Despite repeated warnings about the economic slowdown in China, the authorities' decision to keep the LPR unchanged is interpreted as taking into account its effectiveness and the current liquidity situation in the market.

First, with the 0.25 percentage point cut in the RRR on the 15th, approximately 600 billion yuan (about 117 trillion KRW) will be injected into the market starting from the 25th. Additionally, 600 billion yuan from the People's Bank of China's profits last year will be transferred to the treasury, releasing fiscal funds from this month. The 600 billion yuan effect is equivalent to the 0.25 percentage point RRR cut.

Chinese media such as Caixin reported that the People's Bank of China will allocate 1.1 trillion yuan of this year's profits to the treasury for use in tax reductions and other measures, indicating that Chinese authorities will pursue fiscal policy alongside monetary policy.

Above all, it appears that the effect of interest rate cuts is diminished because consumers are confined at home due to lockdowns. It seems the authorities judged that lowering interest rates would be more effective once COVID-19 is under control.

In fact, last month, China's retail sales showed a negative growth of -3.5% compared to the previous month. This is the first time retail sales have turned negative in 20 months since August 2020 (0.5%). Chinese media also mentioned the past synchronization between MLF and LPR, reporting that the People's Bank of China will regulate the pace of interest rate cuts.

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