China will keep the lending benchmark stable as policymakers keep an eye on property risks – archyde

SHANGHAI: A Reuters poll found that China will hold its benchmark interest rate stable on Monday at its monthly fix as policy makers try to limit risk appetite in the real estate sector.

A quick survey of 23 market participants this week found that 21 did not expect any change in the one-year loan prime rate (LPR) or five-year term when setting the next week.

This would be the 19th consecutive month that no rate change has been made, following the People’s Bank of China (PBOC) decision this week to keep the rate on their medium-term loans unchanged.

The remaining two respondents forecast a small 5 basis point reduction in the one-year LPR and do not expect any change in the five-year term that affects mortgage pricing.

The one-year LPR is currently 3.85 percent and the five-year rate is 4.65 percent.

The central bank fully extended the medium-term credit facility (MLF) due this month, leaving borrowing costs unchanged for the 19th consecutive month.

The MLF serves as a guide for the LPR and many traders and analysts say that any adjustment to the LPR should mimic changes in the cost of borrowing on MLF loans.

“Current downward pressure on the economy is relatively high and financial institutions are lacking the motivation to expand lending,” said Ming Ming, director of fixed income research at CITIC Securities, in a press release.

“In the absence of guidance on how to cut reserve levels or interest rates, it will be even more difficult to cut LPRs to narrow banks’ net interest margins to encourage credit expansion,” he said.

Ming added that in response to real estate company credit risks and the downturn in the real estate sector, the policy was already slightly easing.

China’s real estate sector, a major engine of economic growth, has weakened significantly this year as Beijing cracks down on speculation to reduce financial risk.

Premier Li Keqiang said this week that China’s solid economic fundamentals have not changed and insisted that Beijing will not use flood-like incentives.

“I could imagine Chinese politicians trying to strike a very, very strong balance between promoting economic growth, limiting leverage and dealing with what is going on in the real estate sector,” said Carl Tannenbaum, chief economist at Northern Trust.

The LPR is a monthly reference rate for loans set by 18 banks. All 23 responses to the survey were collected from selected participants on a private messaging platform.

(Reporting by Reuters Fixed Income Team, writing by Winni Zhou; editing by Sam Holmes)

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