China likely to keep lending rates steady after May cut, trade truce

China is widely expected to hold its benchmark lending rates steady this month, according to a Reuters survey, following broad monetary easing measures in May. The pause comes amid optimism surrounding a potential trade truce between the U.S. and China, reducing the immediate pressure for further stimulus. However, recent disappointing economic data suggests the need for additional measures remains, with expectations for a potential reduction in the seven-day reverse repo rate and a reserve requirement ratio cut later in the year.

Analysis

China is anticipated to maintain its benchmark loan prime rates (LPRs) unchanged at the upcoming monthly fixing, a consensus view supported by a Reuters survey of 20 market watchers. This expected stability follows significant monetary easing measures implemented in May, which included the first LPR reduction since October and lower deposit rates by major state banks, designed to cushion the economy from the Sino-U.S. trade war's impact. The current cautious stance is further influenced by optimism surrounding a framework agreement on tariff rates between Washington and Beijing, which has reduced the immediate perceived need for additional stimulus. However, this outlook is juxtaposed with a series of disappointing economic data releases, including slower-than-expected credit growth and intensifying deflationary pressures, underscoring a potential ongoing requirement for policy support. Market participants observe that key rates, including the LPR, now tend to move in alignment with the seven-day reverse repo rate, and that additional time is necessary to evaluate the efficacy of the May stimulus. Some economists, such as Ho Woei Chen from UOB, forecast a potential 10 basis point reduction in the seven-day reverse repo rate in the fourth quarter, which would likely guide LPRs lower by a similar margin, and also see the prospect of a further 50-basis-point cut to the reserve requirement ratio (RRR).

Key Decisions for Investors

• Investors should closely monitor upcoming Chinese economic indicators, particularly credit growth and inflation data, alongside developments in U.S.-China trade negotiations, as these factors will be pivotal in shaping future People's Bank of China monetary policy.
• While benchmark lending rates are expected to hold steady in the immediate term, persistent economic weakness and deflationary trends could prompt further easing measures, such as cuts to the seven-day reverse repo rate or the reserve requirement ratio, later in the year, especially if economic conditions deteriorate or trade tensions reignite.
• Given the mixed signals of recent stimulus and trade optimism against underlying economic challenges, a prudent approach involves maintaining vigilance on Chinese asset exposures, balancing the current policy pause with the potential for future intervention driven by economic performance and trade outcomes.