MNI PBOC WATCH: LPR To Fall 10bp On Lower Key Rate

China’s Loan Prime Rate is expected to drop by 10 basis points on Tuesday, following the People’s Bank of China’s recent cut to the 7-day reverse repo rate, as the central bank moves to support weak credit demand amid easing pressure on the yuan.

Authorities on Tuesday will likely set the one-year LPR at 3% and the five-year-plus rate at 3.5%. Both rates have held steady since last October when they fell 25bp – the largest cuts since the LPR reform in 2019. (See MNI PBOC WATCH: PBOC Seen Easing, Guiding LPR Lower, In Q2)

The central bank lowered the 7-day reverse repo rate – its benchmark policy rate – 10bp to 1.4% on May 8, followed by a 50bp reduction to the reserve requirement ratio on May 15.

BALANCING ACT

The long-awaited easing reflects the PBOC’s cautious balancing act between addressing domestic credit weakness and navigating rising external uncertainties. The yuan has recently stabilised after hitting decade lows in April, despite sluggish borrowing demand and export activity under pressure from U.S. tariffs. 

Sun Lijian, director at the Financial Research Center at Fudan University and a PBOC advisor, told MNI recently that policymakers must retain flexibility to respond to fallout from the U.S. tariffs, while advancing innovation-driven growth and upgrading China's industrial structure.

Weak domestic demand, external shocks and inefficiencies in policy transmission mean the central bank must closely monitor the real economy and better coordinate with fiscal and industrial policy, Sun said, adding that authorities are prioritising structural monetary tools over broad-based interest rate or RRR cuts to reflect the complexities of China’s structurally imbalanced economy. (See MNI INTERVIEW: China Has Room For Further Monetary Easing)

The PBOC’s April data showed additional tariffs have further eroded loan demand and business confidence, with new loans totalling just CNY280 billion, a year-on-year decline of CNY450 billion and far short of the CNY764.4 billion expected. Corporate borrowing grew at a slow pace, while household demand contracted. 

Still, optimism has returned following last week’s Geneva talks between China and the U.S., which produced breakthroughs that could lead to improved exports and ease some of the economic pressure. Further negotiations are expected to continue within a 90-day window.

TRADE TALKS

A policy advisor told MNI that China’s bottom line in future trade talks is to reduce U.S. tariffs to Washington’s 10% baseline, adding that Chinese exporters could remain competitive even under U.S. import duties of up to 20%, supported by state subsidies and cost reductions. 

The easing also coincides with a rising yuan, largely due to a weakening dollar, alleviating pressure from earlier in the year. Both onshore and offshore yuan fell to their lowest levels in a decade following the U.S.'s announcement of additional tariffs in early April.

Guan Tao, former official at the State Administration of Foreign Exchange and now global chief economist at BOCI China, told MNI the yuan appears to be ending a weakening cycle that began in 2022. A potential U.S. recession, combined with expected Federal Reserve rate cuts and declining confidence in the dollar, could accelerate investor outflows from dollar-denominated assets and support a stronger yuan, he argued.

Chinese exporters should reduce dollar holdings and diversify their trade settlement currencies to hedge against a prolonged weakening of the dollar driven by aggressive U.S. trade policy, he cautioned.