MNI PBOC WATCH: Jan LPR To Hold As Yuan Faces Pressure
MNI (BEIJING) - China's Loan Prime Rate is likely to hold Monday as the central bank prioritizes the yuan's stability while curbing any rapid drop in treasury yields, which are expected to restrain its easing pace.
The one-year LPR will hold at 3.1%, while the five-year rate will remain at 3.6%. Both benchmarks fell in October by 25 basis points, the largest cuts since the reform of the new LPR pricing system in 2019. The rates held steady in December. (See MNI PBOC WATCH: LPR To Ease 50bp In 2025)
The People's Bank of China has continued to shore up the yuan through a stronger-than-expected daily fix, while draining offshore yuan liquidity, following the currency’s recent weakening through the key 7.30 handle against the dollar.
The PBOC will take prompt action to curb excessive fluctuations in fx markets to avoid yuan volatility impacting domestic prices, or stoking financial market panic, noted Guan Tao, a foreign exchange expert and former State Administration of Foreign Exchange official, in a recent interview with MNI. (See MNI INTERVIEW: China-U.S Yuan Deal Unlikely - Guan Tao)
CURRENCY MOVES
The PBOC remains “confident, well-positioned, and capable of maintaining the stable operation of the foreign exchange market,” noted Governor Pan Gongsheng on Monday, adding the Bank will “resolutely” correct pro-cyclical behaviour in the market, address actions that disrupt market order, and maintain the yuan at a reasonable and balanced level.
The central bank also raised the macro-prudential adjustment parameter for cross-border financing by enterprises and financial institutions from 1.5 to 1.75 on Monday, a move aimed at increasing dollar liquidity and encouraging capital inflow to shore up the yuan.
While authorities will take further measures to stabilise the yuan, any worsening in trade tensions with the U.S. over 2025 would likely prompt a steady and gradual depreciation of the currency, MNI reported recently.
POLICY ACTION
Prominent economist Yao Yang told MNI recently that the PBOC is likely to cut its policy rate at a steady pace while pushing down bank deposit interest rates, even at the cost of weakening the yuan, as economic growth tops policymaker’s priorities. The yuan could depreciate this year if China’s growth rate falls to between 4-5%, while the U.S. economy expands by 2.5-3.5%, he predicted.
The rapid drop in 10-year treasury yields to historic lows, driven by traders’ overzealous expectation of future easing, will also constrain the Bank’s easing pace. Zou Lan, head of the monetary policy department at the PBOC, told reporters last week’s suspension of bond purchases would help stabilise the fixed-income market, noting yields will eventually reflect better economic expectations.