MNI PBOC WATCH: April LPR To Hold As Tariff Impact Contained

China's Loan Prime Rate is likely to remain unchanged in April after strong first-quarter economic data and as official support for capital markets has succeeded in lowering volatility amid tariff tensions. 

The LPR is set to be held at 3.1% for the one-year maturity and 3.6% for five years and over next Monday. Both rates fell by 25 basis points in October, the largest reductions since 2019’s LPR pricing reform. 

China’s economy saw a better-than-expected recovery in Q1 as exporters front-loaded business in March ahead of U.S tariffs, according to National Bureau of Statistics data on Wednesday. Q1 GDP grew by 5.4% y/y, compared to expectations for 5.2%, while exports jumped by 12.4% in dollar terms in March, the fastest in five months and much higher than expectations for 4.4%. 

The performance laid a solid foundation for China to meet its annual growth target of around 5% and reduced the need for additional easing by the People’s Bank of China for the moment, but the real challenge will begin in Q2 when additional tariffs take effect. 

LIQUIDITY TRAP CONCERN

However, while deflationary pressure could drive more easing later in the year, the PBOC is already beginning to worry that the country may be nearing a liquidity trap, in which monetary policy loses effectiveness at very low levels of interest rates, advisors have told MNI.

One PBOC advisor recently told MNI that the Bank would ease in a timely manner depending on both domestic and external factors, taking particular account of the impact of U.S. tariffs and Q1 GDP data, but that the scope for cutting interest rates would be constrained by concerns about banks’ deteriorating net-interest margins and weak loan demand. (See MNI: Low Credit Demand Feeds PBOC Easing Caution; Tariffs Key)

Meanwhile, coordinated purchases by state-backed funds have ensured that the performance of Chinese stock markets has remained resilient despite the tariff shock, further reducing the urgency for the PBOC to step in.

Bank of China Research Chief Zong Liang said the PBOC is likely to continue to provide relending support to the state-backed Central Huijin Investment company, part of the so-called “national team” working as a quasi-stabilisation fund for equity markets, and to expand and modify a relending facility introduced in October 2024 to fund stock buybacks. (See MNI INTERVIEW: PBOC To Ease In Tariff Response - BOC's Zong)

The risk of a significant yuan depreciation is another factor likely to restrain further easing for now. While the PBOC has allowed a gradual decline in the currency as the tariff war has intensified, officials will be concerned that any sharp losses would risk exacerbating capital outflows and spark significant volatility in Asian exchange rates, potentially undermining China’s drive for regional cooperation in the face of U.S. trade policies. (See MNI: PBOC Seen Gradually Weakening Yuan Fixing Amid Trade War)

Traders said 7.35 to the dollar remains a key level for the onshore USDCNY rate in the short term after the central bank’s daily fixing breached 7.20, the highest since September 2023. Yuan volatility is likely to increase as the trade war continues, they said.