(Bloomberg) -- China may be done with rate cuts for now as policymakers turn to other means to support the economy and stabilize credit growth headed into the new year. 

The nation’s commercial lenders maintained their benchmark lending rates — including the five-year loan prime rate used as a reference for mortgages — on Monday. That was broadly in line with expectations after the People’s Bank of China kept a key policy rate called the medium-term lending facility rate on hold last week. The loan rates are quoted as a spread over that rate and usually but don’t always track its moves. 

Policymakers and lenders have cut their rates on a handful of occasions this year to help the economic recovery, though their room to maneuver has become more limited due to pressures on the yuan and capital outflows, along with narrowing profit margins for banks. A rise in time deposits also pushed up lenders’ costs. That means China has been looking at other ways to boost liquidity and support lending. 

“There’s not much room to lower the LPRs further” due to previous reductions in mortgage and other loan rates, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “Coordinating credit extension pace and stepping up credit support to targeted sectors is a better way to expand domestic demand and lift confidence.”

That shift in focus was apparent last Friday, when the PBOC and other financial regulators told the country’s biggest lenders and asset managers to meet all “reasonable” funding needs from property firms. They said banks should coordinate credit growth from now through early next year, adding that a stable expansion of credit can help boost the economy. 

That meeting signaled “a smoother pace of credit support,” Pang said. Loan growth is usually slower in the final months of the year, before banks push to hit their lending targets in the first quarter. This year credit growth was strong in the first three months because of the post-pandemic reopening, but borrowing demand has been weak ever since.

“Credit figures will be better in November and December, to avoid any self-fulfilling panic in the market about the state of the economy,” Pang added.

China’s Loan Prime Rates

• One-year loan prime rate held at 3.45%, in line with expectations among 17 of 18 economists surveyed by Bloomberg
• Five-year rate kept at 4.2%, matching estimates from 15 of 16 economists

The offshore yuan extended morning gains to trade 0.5% stronger than the dollar to 7.1816, as sentiment buoyed risk-assets globally. Ten-year government bond yields were little changed at 2.66%.

Alongside encouraging lenders to keep credit growth stable through the rest of the year, the PBOC has taken other measures to support the economy short of rate cuts. After keeping its one-year policy rate unchanged last week, the PBOC pumped the most cash into the financial system since late 2016 through those loans. That was intended to help meet liquidity needs spurred by Beijing’s move to support the economy via an unusual sale of sovereign bonds. 

What Bloomberg Economics Says ... 

“The decision by China’s commercial lenders to keep their prime rates steady on Monday was almost a foregone conclusion after the People’s Bank of China held rates last week. The question is, what’s next? We expect additional easing, but with measures focused more on stimulating credit growth rather than lowering borrowing costs.”

— Eric Zhu, economist 

Read the full report here.

“Quantitative measures – liquidity injections – are still preferred over outright interest rate cuts to stimulate economic activities,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp. “With the earlier outsized MLF operations, the authorities may adopt a wait-and-see approach for now regarding further liquidity releases but an RRR cut is still possible.”

The outsized cash injection sparked discussion over whether the central bank will still cut the reserve requirement ratio for banks — which determines the amount of cash lenders need to keep in reserve — before the end of the year. Citigroup Inc. economists have said last week’s move may mean the RRR cut is delayed into 2024.

--With assistance from Qizi Sun and Wenjin Lv.

(Updates with additional details throughout.)

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