China to Hold Lending Rates Steady Amid Trade Tensions

SHANGHAI (Reuters) - China is likely to maintain its benchmark lending rates unchanged on Thursday, according to a Reuters poll. This move reflects the authorities' delicate balancing act between prioritizing financial stability and providing stimulus in the face of rising trade tensions.

Despite adopting a more accommodative monetary policy stance this year, the central bank has taken a cautious approach to cash injections due to concerns about yuan volatility and shrinking net profit margins for lenders.

The loan prime rate (LPR), typically charged to banks' most creditworthy customers, is calculated monthly based on proposed rates submitted by 20 designated commercial banks to the People's Bank of China (PBOC). A recent Reuters survey of 30 market observers unanimously predicted that both the one-year and five-year LPRs would remain unchanged.

The central bank signaled last week its willingness to adjust monetary policy as necessary to support the economy amidst external headwinds, particularly the prospect of a worsening trade war with the United States under President Donald Trump.

Trump's announcement of a 10% tariff on Chinese imports as part of his broader trade agenda has prompted retaliation from Beijing.

"The recent developments highlight the PBOC's longstanding stability dilemma - balancing policy easing for economic growth with preserving financial stability," said Xinquan Chen, an economist at Goldman Sachs. "FX stability remains a key constraint on policy rate cuts."

Chen, however, believes that persistent deflationary pressures warrant significant monetary loosening. He forecasts two 50-basis-point cuts to the reserve requirement ratio (RRR) in the first and third quarters of 2023, along with two 20-basis-point reductions to policy rates in the second and fourth quarters.

The yuan has depreciated by 2.5% against the dollar since Trump's election in November 2016. During his first term, tit-for-tat tariff announcements between the US and China caused the yuan to lose over 12% of its value against the dollar between March 2018 and May 2020.

Meanwhile, a surge in new bank loans in January to a record high has reduced the immediate need for monetary easing, according to traders.

"Monetary policy has effectively entered a wait-and-see mode," noted Citi analysts in a report. "We anticipate rate and RRR cuts only from the second quarter of 2023. Given the limited flexibility of fiscal policy, details from the upcoming National People's Congress (NPC) will be crucial for signaling the policy direction in the first half of 2023."