One-year rate stays at 3.0%, five-year at 3.5%; sluggish consumption and real estate weigh on outlook

People browse products at a store in Shanghai, China. [EPA]
People browse products at a store in Shanghai, China. [EPA]

China held its Loan Prime Rate — which serves in effect as the country's benchmark interest rate — unchanged for the 13th consecutive month, as markets had widely expected.

The People's Bank of China announced Monday that it would keep the one-year LPR, the reference rate for general loans, at 3.0 percent and the five-year LPR, which guides mortgage lending, at 3.5 percent.

Under China's system, 20 major commercial banks submit rates each month reflecting their own funding costs and risk premiums to an interbank lending center, and the central bank compiles and reviews the submissions before publishing the LPR.

China maintains a separate official benchmark interest rate, but authorities have left it untouched for an extended period, making the LPR the de facto benchmark for commercial banks.

Market analysts had forecast that China would extend its rate-hold stance this month. A Reuters survey of 30 market participants conducted June 18 found that all respondents expected China to leave the LPR unchanged.

China cut the LPR by 25 basis points in October 2024 — lowering the one-year rate from 3.35 percent to 3.1 percent and the five-year rate from 3.85 percent to 3.6 percent — amid weak domestic demand and a prolonged real estate slump. It trimmed both rates by a further 10 basis points last May as pressure mounted to stimulate the economy in response to the tariff war with the Donald Trump administration, but has not adjusted the LPR since.

Reuters noted that while China's manufacturing sector has benefited from surprisingly resilient exports, a so-called K-shaped divergence is widening, with domestic demand deteriorating against the backdrop of a real estate downturn that has dragged on for years.

Henry Hao, chief economist at Germany's Commerzbank, said China is "showing patience despite the imbalance between robust manufacturing supply and weakening domestic demand," adding that "with the housing wealth effect still muted and labor market recovery sluggish, policymakers appear reluctant to roll out stimulus measures — suggesting the economy will follow an unbalanced, export-dependent trajectory without any major short-term intervention through the third quarter."

Citigroup said in a recent report, however, that China could cut rates by a symbolic 10 basis points in the second half of this year, and that the timing could be brought forward if domestic demand weakens further.


mokiya@heraldcorp.com