China keeps key lending rates unchanged after May cut

China left benchmark lending rates unchanged on Friday, continuing the course set after massive monetary easing measures last month. The decision coincided with a partial reduction in concerns about a slowdown in economic growth after reaching a trade agreement with the United States.

The People's Bank of China kept its annual Loan Prime Rate (LPR) at 3.0% and its five-year LPR at 3.5%, in line with forecasts from a Reuters poll.

Last month, Chinese authorities cut lending rates by 10 basis points for the first time since October to mitigate the impact of trade disputes with Washington. Many commercial banks have also lowered deposit rates to protect their interest margins.

The LPR, which is applied to the most reliable borrowers of banks, is calculated based on the proposals of dozens of selected commercial banks sent to the central bank. The annual LPR rate affects the cost of corporate and most consumer loans, while the five-year rate serves as a benchmark for mortgage lending.

Fears of a trade war eased after the US and China agreed this month to abide by the consensus reached in Geneva in May. This made it possible to resume trade in rare earth metals and high-tech products between the countries, as well as to suspend the introduction of burdensome tariffs.

The offshore yuan, which has appreciated more than 2% since the start of the year, stood at 7.1805 per US dollar, recovering from a fall to a record low of 7.4287 in early April, when the US imposed tariffs on Chinese imports of 145%.

"Now that the pressure on the yuan has eased, the People's Bank of China has more room to pursue flexible policies in the future," said Bruce Peng, an associate professor at the Chinese University of Hong Kong Business School.

According to Barclays, the trade truce gave Beijing an opportunity to support the national currency and strengthened hopes that the blow to the economy will be less significant than previously expected.

Against this background, Nomura adjusted its forecast for a rate cut in the fourth quarter from 15 basis points to 10 basis points, while maintaining its estimate for a 50 basis point reduction in the mandatory reserve ratio.

According to Nomura economists, in the short term, the Chinese authorities are unlikely to rush with additional fiscal stimulus measures, but in the second half of the year they may increase support if the effect of premature business purchases begins to weaken.

Bruce Peng added that recent statements by Chinese officials indicate a high degree of satisfaction with the current state of monetary policy. According to him, the authorities are increasingly considering rate cuts and other monetary instruments as a restrained supporting element and at the same time looking for alternative ways to stimulate the economy.

Zhu Hexin, head of the State Administration of Foreign Exchange Control, told a financial forum in Shanghai that China's ability to counter currency market fluctuations has improved significantly. The head of the People's Bank of China, Pan Gongsheng, confirmed Beijing's desire to expand the use of the digital yuan in the international arena and supported the idea of a multipolar system of global currencies.