CORRECT:MNI PBOC WATCH: Nov LPR To Hold, CGB Purchases To Rise

(Corrects date of decision to Thursday)

China’s Loan Prime Rate is expected to remain unchanged in November as banks continue to face pressure from narrowing interest margins, even as the central bank signals an accommodative stance through its restart of treasury purchases. 

The one-year LPR is likely to remain at 3.0% and the five-year at 3.5% on Thursday. Both were reduced by 10 basis points in May after the People’s Bank of China cut the 7-day reverse repo rate to 1.4% on May 8 and lowered the reserve-requirement ratio by 50bp on May 15.

In its Q3 Monetary Policy Report last week, the PBOC adopted a more optimistic tone than in the previous quarter, saying “the economy is progressing, with a solid foundation and support to achieve the annual target” and that prices “are showing signs of improvement.” Markets interpreted the shift as a sign that the urgency for additional rate cuts is diminishing through year-end, with structural tools expected to take a more prominent role during China’s economic transformation.

Guo Tianyong, deputy chair of the Beijing Committee of the China National Democratic Construction Association, told MNI this month that China is entering a period of persistently low interest rates and weak credit and consumption demand as the era of heavy real-estate investment fades and technology-sector investment remains insufficient to fill the gap. (See MNI INTERVIEW: PBOC To Boost Tech Loans Via Structural Tools）

Traditional easing tools such as interest-rate and RRR cuts are becoming less effective in an environment of subdued price levels, he argued. Any rate reduction would also need to consider bank profitability, with net interest margins at historic lows, a point emphasised in the Report’s discussion on lenders’ margins.

STABLE BANK MARGINS

The PBOC stressed it will support banks in stabilising margins, warning that loan rates have been falling faster than deposit rates. Guo noted that household deposits remain an important source of investment income and cannot be driven to zero without risking significant deposit outflows. 

The report also instructed banks “not to issue loans with post-tax interest rates lower than the yield of treasury bonds of the same maturity”. For a 10-year loan, this places a floor of around 2.41%, given current yields near 1.80%, limiting room to push the LPR lower unless bond yields decline further.

As a result, economists expect the PBOC to rely more heavily on treasury bond purchases to guide yields. Although the recent CNY20 billion restart was smaller than expected, analysts said the Bank wants to avoid aggressively driving yields down. (See MNI: PBOC To Increase CGB Purchases, Add Longer Tenors）

Wen Bin of China Minsheng Bank said the 10-year yield could briefly touch 1.7% if purchases rise, before stabilising within a 1.7-1.9% range. China Merchants Securities projects net purchases of around CNY500 billion this year, though more than CNY700 billion would be needed to generate a net base-money injection, compared with CNY1 trillion bought in late 2024.