China has frozen its loan preference rate (LPR), which is the benchmark interest rate, for five months. Analysts say that although the possibility of deflation (a phenomenon in which prices fall and economic activity stagnate) has increased, the Chinese authorities are taking capital outflows more seriously.
The People’s Bank of China maintained its one-year LPR at 3.45% and five-year maturity at 4.20% on the 22nd, the same as the previous month. LPR is the average value of loan interest rates for high-quality customers at commercial banks, but it is actually considered China’s benchmark interest rate as the People’s Bank uses it for various economic policy decisions.
China lowered its one-year LPR by 0.1 percentage point for the first time in two months on Aug. 21 last year, and has been freezing it since September. The five-year contract has been frozen for seven consecutive months. The market predicted that the LPR will also be frozen as the one-year interest rate of the mid-term liquidity support window (MLF) announced on the 15th was frozen by 2.50 percent.
China’s deflationary crisis is growing, with consumer price growth falling for three consecutive months as of December last year, but it is interpreted that the People’s Bank of China has put its financial easing policy on hold as the U.S. Federal Reserve’s interest rate cut to be announced in March is less likely and the bank’s profitability is more likely to deteriorate.
Although China’s economic growth rate (5.2%) exceeded the government’s target of 5 percent last year, economists say that the 5.2 percent growth rate is a disappointing result, noting that it was affected by the “collaborative effect” last year when the COVID-19 outbreak was virtually over. China’s economy has been struggling to recover from a series of negative factors, including a slump in the real estate market, local government debt problems, shrinking the domestic market and falling foreign investment. The market predicts that China’s economic growth rate will remain at 4 percent this year.