China Unexpectedly Leaves Lending Rates Steady; Markets Expect Cuts Soon 

People walk past a booth with the Communist Party emblem next to a business center in Yiwu, China's eastern Zhejiang province on September 20, 2024. (AFP)
People walk past a booth with the Communist Party emblem next to a business center in Yiwu, China's eastern Zhejiang province on September 20, 2024. (AFP)
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China Unexpectedly Leaves Lending Rates Steady; Markets Expect Cuts Soon 

People walk past a booth with the Communist Party emblem next to a business center in Yiwu, China's eastern Zhejiang province on September 20, 2024. (AFP)
People walk past a booth with the Communist Party emblem next to a business center in Yiwu, China's eastern Zhejiang province on September 20, 2024. (AFP)

China unexpectedly left benchmark lending rates unchanged at the monthly fixing on Friday, confounding market expectations that were primed for a move after the Federal Reserve delivered an outsized interest rate cut earlier this week.

However, market watchers widely believe further stimulus will be rolled out to prop up an ailing economy, as the Fed's easing offers Beijing leeway to loosen monetary policy without unduly hurting the yuan.

The one-year loan prime rate (LPR) was kept at 3.35%, while the five-year LPR was unchanged at 3.85%.

In a Reuters survey of 39 market participants conducted this week, 27, or 69%, of all respondents expected both rates to be trimmed.

"The rate cut is likely to be included in a larger policy package, which is being reviewed by senior officials," said Xing Zhaopeng, senior China strategist at ANZ, referring to Chinese policymakers.

"Current economic data and expectations all support a rate cut. And, lowering existing mortgage loan rates also requires further reductions in the 5-year LPR, which may lead to a one-time and significant decline in the LPR in the fourth quarter."

A string of August economic data, including credit lending and activity indicators, surprised to the downside and raised the urgency to roll out more stimulus measures to prop up the world's second-biggest economy, market watchers said.

Analysts and policy advisers expect Chinese policymakers to step up measures to at least help the economy meet the increasingly challenging 2024 growth target.

Faltering Chinese economic activity has prompted global brokerages to scale back their 2024 China growth forecasts to below the government's official target of about 5%.

President Xi Jinping last week urged authorities to strive to achieve the country's annual economic and social development goals, state media reported, amid expectations that more steps are needed to bolster a flagging economic recovery.

"There is a good chance that the People's Bank of China (PBOC) will lower rates and banks to lower LPRs soon," analysts at Commerzbank said in a note.

"Lackluster growth calls for monetary policy easing, and the Fed rate cuts provide room for PBOC to cut."

Monetary policy divergence with other major economies, particularly the United States, and a weakening Chinese yuan have been the key constraints limiting Beijing's efforts to loosen policy over the past two years.

But the US central bank's 50-basis-point cut on Wednesday that kicked off an anticipated series of interest rate cuts has unshackled some of China's policy levers, analysts say.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.



US Economy Grew at Solid 3% Rate Last Quarter, Government Says in Final Estimate

FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
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US Economy Grew at Solid 3% Rate Last Quarter, Government Says in Final Estimate

FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)

The American economy expanded at a healthy 3% annual pace from April through June, boosted by strong consumer spending and business investment, the government said Thursday, leaving its previous estimate unchanged.
The Commerce Department reported that the nation's gross domestic product — the nation's total output of goods and services — picked up sharply in the second quarter from the tepid 1.6% annual rate in the first three months of the year, The Associated Press reported.
Consumer spending, the primary driver of the economy, grew last quarter at a 2.8% pace, down slightly from the 2.9% rate the government had previously estimated. Business investment was also solid: It increased at a vigorous 8.3% annual pace last quarter, led by a 9.8% rise in investment in equipment.
The final GDP estimate for the April-June quarter included figures showing that inflation continues to ease, to just above the Federal Reserve’s 2% target. The central bank’s favored inflation gauge — the personal consumption expenditures index, or PCE — rose at a 2.5% annual rate last quarter, down from 3% in the first quarter of the year. Excluding volatile food and energy prices, so-called core PCE inflation grew at a 2.8% pace, down from 3.7% from January through March.
The US economy, the world's biggest, displayed remarkable resilience in the face of the 11 interest rate hikes the Fed carried out in 2022 and 2023 to fight the worst bout of inflation in four decades. Since peaking at 9.1% in mid-2022, annual inflation as measured by the consumer price index has tumbled to 2.5%.
Despite the surge in borrowing rates, the economy kept growing and employers kept hiring. Still, the job market has shown signs of weakness in recent months. From June through August, America's employers added an average of just 116,000 jobs a month, the lowest three-month average since mid-2020, when the COVID pandemic had paralyzed the economy. The unemployment rate has ticked up from a half-century low 3.4% last year to 4.2%, still relatively low.
Last week, responding to the steady drop in inflation and growing evidence of a more sluggish job market, the Fed cut its benchmark interest rate by an unusually large half-point. The rate cut, the Fed’s first in more than four years, reflected its new focus on shoring up the job market now that inflation has largely been tamed.
Some other barometers of the economy still look healthy. Americans last month increased their spending at retailers, for example, suggesting that consumers are still able and willing to spend more despite the cumulative impact of three years of excess inflation and high borrowing rates. The nation’s industrial production rebounded. The pace of single-family-home construction rose sharply from the pace a year earlier.
And this month, consumer sentiment rose for a third straight month, according to preliminary figures from the University of Michigan. The brighter outlook was driven by “more favorable prices as perceived by consumers” for cars, appliances, furniture and other long-lasting goods.
A category within GDP that measures the economy’s underlying strength rose at a healthy 2.7% annual rate, though that was down from 2.9% in the first quarter. This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.
Though the Fed now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.
On Thursday, the Commerce Department also issued revisions to previous GDP estimates. From 2018 through 2023, growth was mostly higher — an average annual rate of 2.3%, up from a previously reported 2.1% — largely because of upward revisions to consumer spending. The revisions showed that GDP grew 2.9% last year, up from the 2.5% previously reported.
Thursday’s report was the government’s third and final estimate of GDP growth for the April-June quarter. It will release its initial estimate of July-September GDP growth on Oct. 30.