China leaves benchmark lending rates unchanged as Beijing signals tolerance for stronger yuan
The People’s Bank of China (PBOC) building in Beijing, China, on Tuesday, April 18, 2023.
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China’s central bank left benchmark lending rates unchanged on Tuesday as authorities made a balancing act of supporting a slowing economy while maintaining currency stability.
The People’s Bank of China kept 1-year and 5-year loan interest rates steady at 3% and 3.5%, respectively, for the tenth consecutive month despite economic growth.
The 1-year rate serves as the reference point for most new and outstanding loans, while the 5-year rate affects mortgage loans.
The world’s second-largest economy showed signs of slowing in the final quarter of last year, growing 4.5% annually, its slowest pace since the country lifted strict Covid restrictions in late 2022.
Chinese authorities are struggling to save the economy from entrenched deflation as consumers cut back on spending due to a protracted housing crisis, bleak job market and uncertain income prospects.
Retail sales growth fell to a 3-year low of 0.9% in December, while the GDP deflator, a measure that captures changes in prices of goods and services, remained negative for 11 consecutive quarters.
Policymakers have turned to encouraging consumption of services to increase overall spending; They believe that aged care services, entertainment and tourism can help offset weak demand for goods.
According to LSEG data, the Chinese yuan has continued to appreciate in recent months; The offshore yuan rose from around 6.974 per US dollar at the beginning of the year to 6.889 per US dollar on Tuesday morning.
The PBOC has signaled some tolerance for a gradual strengthening of the currency in recent weeks, with dollar weakness paving the way for the yuan to continue its rise.
The central bank manages the yuan by keeping it within a band of 2% either side of the midpoint it sets each trading day. The authorities lowered the so-called fixing level even further, below the 7 reference point. for the first time in almost three years In late January.
A strengthening yuan could test the country’s export machine, already under pressure from U.S. tariffs, and erode the competitive advantage of exporters facing price pressure from other manufacturing rivals.
Economists at ING predict a fluctuation band between 6.85 and 7.25 this year as Beijing seeks to advance the internationalization of its currency. “It will be a wild card if the monetary stability target is softened in 2026,” the bank said.
