Monday 15 January 2024 4:43 am

China’s central bank unexpectedly keeps lending rates steady; stocks recover from early slump

China’s economy has lagged post-Covid, with weak consumer demand, persistent deflationary pressures and a contraction in factory activity.

The People’s Bank of China has defied market expectations of providing a much-needed economic boost through additional easing measures by opting to maintain a crucial interest rate unchanged. This move initially caused Mainland China stocks to decline but eventually recovered during Monday’s session.

The interest rate on nearly 1 trillion yuan in one-year loans to financial institutions, known as the medium-term lending facility, remained at 2.5%, defying predictions of a cut by at least 0.1%, according to a Bloomberg poll of 18 economists reported by the Financial Times.

“The authorities may be concerned about bank profitability limiting the appetite for lowering interest rates across the broader banking sector. The chance of a Reserve Requirement Ratio cut in February is now higher,” said Zhaopeng Xing, Senior China Strategist at ANZ.

“We also expect the PBoC to draw on other unconventional tools, including liquidity supports to the property market,” he added.

Following the announcement, Mainland China’s CSI 300 index initially dropped by about 0.5% at the opening but later rebounded to a 0.17% gain. In contrast, Hong Kong’s Hang Seng index experienced a 0.15% decline. The market downturn was led by a roughly 1.5% drop in real estate developers, while new energy shares fell by 1%, and Hong Kong-listed tech giants declined by approximately 2%.

Despite a December uptick in exports, weak credit growth and persistent deflationary pressures prompted calls for additional stimulus measures to support China’s uneven economic recovery. However, constraints on the People’s Bank of China’s flexibility include a narrowing interest rate margin at commercial banks and a weakening Chinese yuan. Some market analysts suggest that rate cuts may be delayed until later in the year.

Investors are eagerly awaiting China’s fourth-quarter gross domestic product (GDP) figures, scheduled for release on Wednesday. China’s Q4 GDP is anticipated to be around 1% for the quarter and 5.2% year-on-year. Additionally, Japan will release inflation figures for December on Friday.