In December 2024, the Loan Prime Rate (LPR) in China has remained unchanged, aligning with market expectationsThe People's Bank of China (PBOC) authorized the National Interbank Funding Center to announce that as of December 20, the one-year LPR stands at 3.1%, while the LPR for maturities exceeding five years is at 3.6%. Both figures reflect no change from the previous month.

This year has witnessed a series of policy interest rate reductions by the PBOC, aimed at easing borrowing costs throughout the economy and stimulating financial activitySpecifically, over the course of 2024, the LPR witnessed three significant declines: the one-year LPR was cut from 3.45% to 3.10%, a decrease of 35 basis points; the five-year and longer LPR saw an even more substantial drop from 4.20% to 3.60%, a reduction of 60 basis pointsNotably, this reduction was the most substantial seen in years.

Several recent high-level meetings have set the tone for a moderately accommodative monetary policy to be implemented by 2025, which may involve timely cuts to reserve requirements and interest rates

Analysts are anticipating further reductions in the policy rates next year, which could lead to a continued downward trend in the LPR, thereby enhancing liquidity in the market and lowering costs overall.

After a series of cuts in October, specifically a 25 basis point decrease in both the one-year and five-year LPR, the rates have stabilized in November and December, a trend that some analysts expectedAccording to Wang Qing, Chief Macro Analyst at Dongfang Jincheng, the lack of change in the reverse repurchase rate in December meant that the base for LPR pricing remained stable, suggesting that the lack of fluctuation in the LPR was a probable outcome.

Furthermore, Dong Ximiao, the Chief Researcher at China Industrial Bank, commented that both corporate loans and personal mortgage rates are currently at historic lowsThe reverse repo rate, a critical component in determining LPR, has seen no recent changes, which supports the idea that holding the LPR steady this month was anticipated.

Another reason for the unchanged rates lies in the current narrow net interest margins of banks, which have fallen to historical lows

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In the third quarter of 2024, the net interest margin for commercial banks was recorded at just 1.53%, indicating significant pressures on profitabilityAs such, even though yields on interbank certificates of deposit have markedly decreased recently, banks show little incentive to further cut the LPR given these conditions.

According to Mingming, Chief Economist at CICC, the substantial pressures on banks’ interest margins hinder their ability to proactively reduce the LPR and the reverse repo rateThe current environment creates a challenging landscape; if LPR decreases too quickly, banks may struggle to maintain stable operations which are essential for supporting continued economic growth.

This month’s decision to keep the policy rates and LPR steady comes in the context of improving economic sentiments following a series of proactive policy measuresThe official manufacturing PMI figures in October and November indicated sustained expansion, accompanied by positive trends in macroeconomic indicators of supply and demand, as well as noticeable heating in the property market.

Wang Qing suggests that the focus now shifts to observing how previous policies, particularly aggressive cuts to policy rates and notable reductions in LPR from October, translate into tangible benefits for the real economy

The goal is to lower financing costs for businesses and consumers, stimulate investment, and provide the necessary support to stabilize the cooling property market.

On the monetary policy front, the Central Economic Work Conference of 2024 reiterated the commitment to a moderately accommodative stance, including potential reductions in reserve requirements and interest rates to maintain ample liquidityThis approach aims to ensure that the growth of social financing and money supply aligns with economic growth targets and price stability.

Economists, such as Mingming, anticipate that with liquidity support, there remains potential for LPR to be adjusted downward alongside reverse repo rate cutsFurthermore, a notable portion of loans already benefits from lower-than-LPR rates, suggesting room for optimizing LPR quality and potentially leading to further cuts.

Recommendations from experts indicate that LPR should ideally decrease asymmetrically in relation to policy rate cuts; specifically, policy rates should diminish at a faster rate than LPR

Banks might also consider lowering deposit rates to alleviate funding costs furtherThis strategy could provide crucial assistance in maintaining stability while promoting growth within China’s financial system.

Amid expectations for a continuation of significant rate cuts in 2025, market analysts predict that policy rates could be lowered by as much as 0.5 percentage points, building on this year's previous reductionsSuch adjustments could catalyze consecutive declines in the LPR rates, explicitly targeting residential mortgage lending to provide substantial relief and support to the property market.

Experts like Lian Ping, Chief Economist with Guangfa Securities, concur with projections for ongoing aggressive policy adjustments in the coming yearProposals indicate that lowering the policy rate by 40 to 50 basis points could contribute to declining LPR and encourage faster credit growth while stimulating demand in the economy.

Amidst similar expectations, the Federal Reserve's recent meeting in December, where it opted to reduce rates by 25 basis points, stirred speculation

Observers note that such actions by the U.Scould potentially impact the strength of the dollar, which may introduce volatility in China's currency and monetary policy framework.

Lian Ping cautions that external factors, including possible trade tensions arising from the new U.Sadministration and fluctuating expectations for Fed rates, might impose depreciation pressure on the Chinese yuanTherefore, significant reductions in domestic rates might be tempered to ensure stability, maintaining a cautiously optimistic approach to monetary policy.

Mingming reiterates that despite the Fed’s rate reduction, its overall hawkish stance may complicate future monetary easingThe absence of a decrease in December's LPR may reflect a balancing act in response to both internal economic conditions and the complexities of the global monetary environment, aiming to maintain stable exchange rates while allowing for a flexible monetary policy.