China is widely expected to leave its benchmark lending rates unchanged at the monthly fixing on Monday, a Reuters survey showed, but markets are wagering on more stimulus being rolled out soon in the face of an escalating Sino-U.S. trade war.
Policymakers have to walk a tight rope as the yuan has come under pressure after U.S. President Donald Trump's tariff onslaught, while shrinking interest margins at lenders has continued to limit the scope for monetary easing.
The loan prime rate (LPR), normally charged to banks' best clients, is calculated each month after 20 designated commercial banks submit proposed rates to the People's Bank of China (PBOC).
In a Reuters survey of 31 market watchers conducted this week, 27, or 87% of all respondents expected both the one-year and five-year LPRs to remain steady, while the remaining four participants projected a reduction of 10 to 15 basis points to the five-year rate.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
China last cut its policy rate in September and benchmark LPRs in October.
"I don't think there will be a LPR cut (this month)," said a trader at a wealth management firm.
"They will need to lower the deposit rates first."
A reduction to the banks' deposit rates could alleviate net interest margin pressure at lenders and allow them to lower lending rates.
China's gross domestic product (GDP) grew 5.4% in the first quarter, beating expectations, but markets fear a sharp downturn in the year ahead as U.S. tariff policies pose the biggest risk to the Asian powerhouse in decades.
Indeed, export data was yet to capture the impact from higher tariffs as many factories front-loaded their orders to beat the duties, analysts said.
Trump has raised tariffs on Chinese goods to a massive 145%, prompting Beijing to retaliate with higher 125% duties on U.S. goods in a tit-for-tat trade war that has roiled investors.
Market participants still expect some monetary easing measures in coming months to support the broad economy and cushion the impact of U.S. tariffs.
Any moves to boost stimulus, however, will require policymakers consider the impact on the yuan , which is down 0.4% against the dollar since Trump's April 2 announcement of global tariffs.
"To bolster domestic financial and property markets while promoting yuan internationalization, Beijing most likely won't allow a sharp yuan depreciation against the dollar," said Ting Lu, chief China economist at Nomura.
He said Nomura is maintaining its forecasts for a 50-basis-point reserve requirement ratio (RRR) cut and a 15-basis-point rate cut in the second quarter.
However, "if U.S.-China tensions flare up sharply, triggering substantial stock market selloffs, the People's Bank of China (PBOC) could still quickly respond with RRR cuts to shore up market sentiment, like the case in May 2019," Lu added.
