China's Unchanged Lending Rates: Impact on Global Commodity Prices and Equity Markets

China's central bank, the People's Bank of China (PBoC), has kept its benchmark lending rates unchanged for the ninth consecutive month, according to the National Interbank Funding Center. The one-year loan prime rate (LPR) remained at 3.65 percent, while the over-five-year LPR stood at 4.3 percent. This decision aligns with market expectations, given the unchanged medium-term lending facility (MLF) rate. Economists at Goldman Sachs and Capital Economics do not expect major stimulus measures, as the 5-percent GDP growth target is still within reach. Instead, they anticipate targeted approaches to address issues such as property risks and youth unemployment.



The PBoC's decision to maintain stable lending rates has significant implications for global commodity prices and equity markets. A study using a Bayesian Structural VAR model found that a positive interest rate shock has a negative and persistent effect on commodity prices, with beverages and metals being the most affected. Therefore, the unchanged lending rates in China would likely have a similar impact on global commodity prices, leading to a decrease in their prices.

Moreover, China's monetary policy has clear and distinct influences upon global equity markets. A study using a test for cointegration found that China's emergence and its monetary policy have caused cross-border influences upon the main global stock markets over the past two decades. Given the occurrence of massive turmoil in the global financial markets, such as the 2008 global financial crisis and the COVID-19 pandemic, there are structural changes in the stock markets through the cointegration relationship with China's monetary policy.

Shocks originating in China have a noticeable effect on global financial markets, although the impact is smaller than in case of shocks originating in the United States or global risk shocks. Global equity prices respond significantly to Chinese macro risk shocks, although the impact is roughly half of the effect of shocks stemming from the United States and a third as large as after global risks shocks. Shocks from China also affect European bank valuations, with a greater impact when general market conditions are more volatile. Banks with higher exposure to China are likely to see their equity prices react more heavily to negative Chinese macro risk shocks.

In conclusion, China's unchanged lending rates have a negative impact on global commodity prices, particularly for beverages and metals. Additionally, China's monetary policy has clear and distinct influences upon global equity markets, with both short- and long-run effects, as well as structural changes in response to global financial market turmoil. As China continues to play a significant role in the global economy, its monetary policy decisions will remain an essential factor for investors to consider when assessing the performance of global commodity prices and equity markets.