China Holds Benchmark Lending Rates Steady Amid Yuan Weakness

China's central bank, the People's Bank of China (PBOC), left benchmark lending rates unchanged on Monday, January 20, 2025, as the country grapples with a weakening yuan and awaits policy clues from the incoming Donald Trump administration. The one-year loan prime rate (LPR) was kept at 3.1%, while the five-year LPR remained at 3.6%. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

The PBOC's decision comes as the offshore yuan has lost more than 3% since Donald Trump's presidential election victory in early November, putting downward pressure on the currency. The tightly-controlled onshore yuan has also retreated to near a 16-month low. Despite the upbeat headline figures, economists caution that some underlying growth drivers might be temporary, amid weak consumer demand, a deepening property market slump, and looming tariff hikes from the incoming Trump administration.



China's economic activity accelerated more than expected in the final quarter of last year, as Beijing's stimulus measures announced since last September kicked in and helped the economy meet its annual growth target. However, the country's exports face multiple headwinds, including growing resistance in developed countries and some developing countries to accommodating a surge of exports from excess production, which means protectionist policies are on the rise worldwide. Additionally, China's exporters are likely to face higher tariffs and greater restrictions to their market access in years to come.



China's quandary is a peculiar one. Superficially, the yuan looks as though it ought to be rock-solid, with a healthy current account surplus, a positive net international investment position, and a 40% undervalued status on a purchasing power parity (PPP) basis. However, the country's current account has been shrinking, and its dependence on exporting its way out of domestic economic morass is at greater risk than it first appears. Measures such as the European Union's Carbon Border Adjustment Mechanism (CBAM) could hit China's exports harder than those of other countries, while the rapid and large fall in the Japanese yen over the past two years could alter the attractiveness of Japanese exports relative to China.



In conclusion, China's decision to keep benchmark lending rates unchanged amid a weakening yuan reflects the country's delicate balance between maintaining economic growth and managing currency volatility. As the global economic landscape evolves, China must navigate the challenges posed by protectionist policies, shrinking export markets, and domestic economic pressures. By maintaining a stable monetary policy and fostering a more diversified economy, China can better position itself to weather the storms ahead.