China maintains stability in benchmark lending rates amid yuan pressure

China has opted to keep its benchmark lending rates steady during the monthly fixing on Monday, signalling limited room for monetary easing in the face of growing pressure on the yuan. Last week, the People's Bank of China (PBOC) surprised markets by maintaining its medium-term lending facility rate, showcasing a cautious stance.

The central bank's decision, despite recent economic data revealing uneven recovery and deflationary concerns impacting borrowing costs, underscores its reluctance to exacerbate yuan depreciation. Reuters cited Julian Evans-Pritchard from Capital Economics who noted policymakers' "lingering concerns" about the yuan, predicting a cautious approach with a focus on quantitative easing tools.

The one-year loan prime rate (LPR) remains at 3.45 per cent, while the five-year LPR stands unchanged at 4.20 per cent. In a recent Reuters poll involving 27 market watchers, all but one participant anticipated the status quo for both LPRs. The one-year LPR significantly influences most new and existing loans in China, whereas the five-year rate impacts mortgage pricing.

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Despite signs of resilience in the US economy, the yuan faced downward pressure at the beginning of the year, weakening by approximately 1.3 per cent year-to-date. Analysts, including Evans-Pritchard, anticipate the PBOC to resume rate cuts once the yuan stabilizes, projecting a 20 basis point reduction by the end of the second quarter.

Last year, the PBOC reduced the one-year LPR twice by a total of 20 basis points, and the five-year LPR saw a 10 basis point decrease. As the Lunar New Year holidays approach, market observers expect the central bank to increase liquidity injections to meet heightened cash demand from corporations and households.

The week-long holiday begins on February 10 this year. Analysts, as reported by the state-owned China Securities Journal, suggest the PBOC may utilise methods such as reverse repos in open market operations, with the possibility of a reduction in banks' reserve requirement ratio (RRR).

(With inputs from Reuters)