On October 20, the People's Bank of China announced the latest Loan Prime Rate (LPR) figures. The one-year LPR remains at 3.0%, and the five-year LPR stays at 3.5%, both unchanged for several months.
Analysts from Dongfang Jincheng, including Wang Qing, Li Xiaofeng, and Feng Lin, noted that with commercial banks' net interest margins at historic lows, there is insufficient motivation for pricing entities to actively lower their LPR markups.
It's important to highlight that the Federal Reserve resumed interest rate cuts in September. Zhao Yi, a fixed-income analyst at CITIC Securities, predicts that if the Fed's Federal Open Market Committee (FOMC) meeting in October continues with rate cuts, the interest rate differential between China and the U.S. may further narrow, potentially leading to upward pressure on the RMB exchange rate. This could indicate a growing necessity for rate cuts in China, although the timing will depend on the trends in the domestic capital market and the recovery slope of real economic demand.
The lack of motivation for LPR pricing entities to lower their markups is evident, as the October rates have remained stable for the fifth consecutive month.
According to Zhao Yi, after the LPR rate was adjusted downward by 10 basis points in May alongside reverse repos, various rate instruments stabilized. As of now, the reverse repo rate remains unchanged, with the one-year and five-year LPR quoted at spreads of 1.6% and 2.1%, respectively.
From a causative perspective, analysts Wang Qing, Li Xiaofeng, and Feng Lin explain that the stability of the policy interest rate (the central bank's 7-day reverse repo rate) since October suggests no change in the basis for LPR pricing, indicating that the rates would remain stable for the month.
Additionally, impacted by the market's expectations of "anti-involution," rates on major medium- to long-term financial instruments, including AAA-rated one-year interbank certificates of deposit, have recently increased, leading to a marginal rise in financing costs for commercial banks in the money market. Given that commercial banks' net interest margins are at historic lows, there is inadequate impetus for pricing entities to lower their LPR markup, thus aligning with market expectations for stable rates in October.
On a macroeconomic level, analysts argue that since Q3, multiple factors such as extreme weather, steady growth policy rhythm, external volatility, and adjustments in the real estate market have led to a decline in macro data relating to consumption, investment, and industrial production. However, thanks to ongoing trade shifts and changes in last year's base figures, export growth has accelerated, coupled with enhanced fiscal policy since the beginning of the year, and the central bank's interest rate and reserve requirement cuts in May. Consequently, monetary policy has remained largely observational since Q3, serving as the fundamental reason for the recent stability in LPR rates.
The People's Bank of China's monetary policy committee meeting in September explained the main strategies for the upcoming monetary policy, recommending enhanced management, increased foresight, targeted measures, and effective execution based on domestic and international economic conditions and financial market dynamics.
Zhao Yi previously noted that this reflects a focus on optimizing the use of existing financial tools.
Looking ahead, Wang Qing, Li Xiaofeng, and Feng Lin believe that rising external volatility, especially due to U.S. high tariff policies potentially impacting global trade and China's exports in Q4, combined with recent declines in investment and consumption growth rates, will increase the necessity for substantial growth stabilization and job retention measures. They observe that the acceleration in the deployment of 500 billion yuan in new policy-based financial tools since the end of September and an additional 500 billion yuan in local government debt limits in October designed to address existing debt and promote effective investment indicates a strengthening of stabilization policies.
The analysts anticipate that prior to year-end, in efforts to substantially boost domestic demand and consolidate measures to stabilize the real estate market, there is potential for both policy interest rates and LPR quotes to decline. Notably, if the Federal Reserve continues its rate cuts as suggested in September, the constraints on implementing moderately loose monetary policy domestically may weaken further.
Wang Qing, Li Xiaofeng, and Feng Lin predict a new round of interest rate and reserve requirement cuts from the central bank by the end of the year, likely resulting in corresponding reductions in LPR quotes. This would significantly lower borrowing costs for enterprises and individuals, galvanizing intrinsic financing demands, serving as a crucial measure for consumption promotion and investment expansion in Q4 to counteract slowing external demand. With current low pricing levels, there are ample opportunities for monetary policy to adopt a moderately loose path, including rate cuts.
Zhao Yi contends that from the perspective of the necessity for rate cuts, the sustained weak credit, struggling real estate market, low inflation, and high real interest rates make a continuation of the rate-cutting cycle in China highly justified. Feasibility-wise, while the factors leading to September's Fed cuts have created a favorable international environment, domestic banking sector pressure on interest margins remains significant. Therefore, an LPR reduction, leading to lower lending rates, may necessitate prior adjustments to deposit rates. In terms of urgency, despite heightened uncertainties from foreign tariff impacts, China's capital market remains resilient, suggesting that the immediate need for broad monetary policy measures to bolster market confidence may be limited in the short term. Should the October FOMC meeting extend the Fed's rate-cutting decision, the China-U.S. interest rate differential might narrow further, which may heighten appreciation pressures on the RMB and intensify the necessity for rate cuts in China moving forward; however, the operational rhythm will still hinge on domestic capital market trends and the recovery slope of real economic demand.