(Bloomberg) -- Economists narrowly predict that Chinese banks will cut their benchmark lending rates again in the fourth quarter, as pressure on the yuan to depreciate constrains policymakers.
The one-year loan prime rate will likely be cut by 10 basis points or more, according to 10 of the 18 analysts polled by Bloomberg, while the rest see no change. A separate survey found an even split when it comes to the five-year rate, a reference for mortgages, with respondents divided between a hold and a reduction of 10 basis points or more in the final three months of 2024.
The results compiled on Monday — when the central bank unexpectedly cut a key policy rate for the first time in almost a year — reflect the tough decisions facing officials as they look to stimulate weakening domestic demand with lower borrowing costs.
The People’s Bank of China has favored a measured approach to rate cuts in recent years to avoid another build-up of debt and as domestic lenders contend with record-low profit margins. It’s also on alert that cheaper money could be funneled into financial markets instead of flowing into the real economy.
“We see some more room for mini policy rate cuts” as the US Federal Reserve prepares to ease policy in September, said Arjen van Dijkhuizen, senior economist at ABN Amro Bank NV.
“Although we expect piecemeal monetary easing to continue, we think the PBOC is following a cautious approach in terms of timing, also taking into account FX considerations and the historically low profit margins of banks,” van Dijkhuizen said.
Disappointing economic growth in the second quarter likely prompted the central bank to act, as official data showed faltering domestic demand outweighed gains in exports. Most analysts had previously expected the LPRs would stay on hold in the fourth quarter.
With the impact of the modest 10-basis point rate cut unlikely to rev up borrowing demand, economists are calling for more monetary easing to boost confidence.
A Bloomberg survey at the end of July showed a deterioration in the projected growth of retail sales and imports this year, signaling a more pessimistic view of domestic demand. That more than offsets a rosier outlook for exports, dragging down expectations for a full-year expansion of gross domestic product to 4.9% from 5%.
Already, the US and other nations have pushed back on China’s flood of exports such as electric vehicles, which they deem a threat for their domestic industry. The prospect of a second Donald Trump presidency further heightens risks to Beijing’s strategy centered on advanced manufacturing.
“The rotation of growth engines from consumption to exports is in full swing,” said Erica Tay, an economist at Maybank Securities. “The question is, can China’s export-driven industrial boom withstand potentially drastic protectionist measures by the US next year?”
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