The central bank of China held the 1-year loan prime rate and 5-year loan prime rate unchanged in June. The steady LPR is followed by improving May activity data. It brings PBoC’s monetary policy less divergent from the Fed and reigns in the easing cycle.
The People’s Bank of China (PBoC) decided to keep the 1-year Loan Prime Rate (LPR) and 5-year Loan Prime Rate unchanged at 3.70% and 4.45% respectively on June 20. This followed the cut in 5-year LPR by 15 bps last month and marked the fifth month the 1-year LPR remained unchanged.
The steady LPRs are followed by improving May activity data. May activity data have improved somewhat and eased some concerns of the authorities. Besides, we note that total social financing in May was RMB 2790bn, beating consensus estimate of RMB 2015bn. New CNY loans was RMB 1890 bn in May, also beating consensus of RMB 1300bn. It seems to us that the borrowing demand in credit market has rebounded from the dismal April. However, as noted in the May activity data review, with risk of repeated COVID lockdown and broad background of more state control towards private economy, any near-term relief is likely to be temporary.
As LPRs are put on hold this month, the monetary policy divergence between the Fed and PBoC is narrowed somewhat. This could bring relief and a halt to the depreciation trend in RMB temporarily.
Nonetheless, we expect modest monetary easing to remain the overall tone in China in 2022, with 1-year and 5-year LPRs forecast to eventually reach 3.60% and 4.35% respectively in later months. Aside from LPRs, further cuts in other monetary policy rates such as RRR, MLF, and 7-day reverse repo rates are also likely in 2022.
