China Holds Benchmark Lending Rates Steady as Expected

The People's Bank of China (PBOC) has kept its benchmark lending rates unchanged, as expected, in a move that aligns with the central bank's broader monetary policy objectives. The one-year loan prime rate (LPR) remained at 3.1%, while the five-year LPR stayed at 3.6%. This decision comes amidst a weakening Chinese yuan and anticipation of policy clues from the incoming Donald Trump administration.



The PBOC's decision to maintain benchmark lending rates is driven by several primary factors, including the need to maintain yuan stability, support economic growth, ensure financial stability, and implement counter-cyclical adjustments. By keeping lending rates unchanged, the PBOC aims to promote economic growth, maintain financial stability, and foster a supportive environment for social financing.

However, the PBOC's strategy of defending the yuan carries risks for the economy. A stronger yuan makes imports more expensive, which can negatively impact consumer demand, especially when it is already fragile. On the other hand, a weaker yuan can help keep Chinese exports competitively priced abroad, but it may also lead to increased inflation and potential capital outflows.

In recent months, the PBOC has prioritized defending the yuan against pressure for it to depreciate, as a weaker yuan could help stimulate economic growth. However, this strategy may limit the PBOC's ability to implement further monetary easing measures, such as lowering interest rates, without causing excessive currency depreciation.

As of January 2025, the Chinese yuan has fallen 2.5% against the U.S. dollar since Donald Trump's election victory in November 2024. This depreciation has put pressure on the PBOC to maintain the yuan's stability while also trying to stimulate a faltering economy.

In conclusion, the PBOC's decision to keep benchmark lending rates unchanged is driven by the need to maintain yuan stability, support economic growth, ensure financial stability, and implement counter-cyclical adjustments. However, the stability of the Chinese yuan carries potential risks that the PBOC must consider when making policy decisions. The central bank's commitment to a proactive fiscal policy and an accommodative monetary policy in 2025 is expected to contribute to China's economic growth and stability, but it may also present challenges in maintaining financial stability and managing the exchange rate.