China holds benchmark lending rate for 15th straight month

© Reuters. FILE PHOTO: People walk in Lujiazui financial district during sunset in Pudong, Shanghai, China July 13, 2021. REUTERS/Aly Song

SHANGHAI (Reuters) -China kept its benchmark lending rate for corporate and household loans unchanged at its monthly fixing on Tuesday, despite growing expectations for a cut after a surprise lowering of bank reserve requirements.

The one-year loan prime rate (LPR) was kept at 3.85%. The five-year LPR remained at 4.65%. The rate was unchanged for the 15th straight month.

Eleven traders and analysts, or 52.4% of 21 participants, in a snap Reuters poll conducted this week predicted no change in either rate, while the remaining 10 respondents all expected a cut to the one-year tenor.

The mixed expectations come as market participants wonder if the central bank was fine-tuning banking system liquidity or starting a more broad-based easing cycle to arrest an economic slowdown.

The People's Bank of China (PBOC) lowered the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($154.21 billion) in long-term liquidity to underpin its post-COVID economic recovery that was starting to lose momentum.

However, the central bank then kept borrowing costs of medium-term lending facility (MLF), which serves as a guide for the LPR, unchanged at its latest operation last week, when it partially rolled over maturing loans.

"As long as the MLF rate remains unchanged, commercial banks don't have strong motivations to lower the LPR," said a bond trader at a Chinese bank.

The LPR is a lending reference rate set monthly by 18 banks, who submit a monthly quotation by adding a premium over the MLF rate.

Setting the LPR slightly higher than the MLF rate in theory gives borrowers access to funds at rates that better reflect funding conditions.

"Any cut to the MLF rate will directly affect bank net interest margins, which is crucial for systemic financial stability," Lu Ting, chief China economist at Nomura said in a note earlier.

"We believe Beijing has no intention of squeezing banks' margins further and thus will be very reluctant to cut policy rates. To counteract the expected slowdown, Beijing is more likely to rely on fiscal measures and PBOC lending."

A second trader at a Chinese bank said "moves in the interbank money rates must affect the borrowing cost in the real economy, not the other way around."

Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages.

($1 = 6.4846 Chinese yuan)