China keeps lending rates steady; trade war raises bets for stimulus

China kept benchmark lending rates steady on Monday for the sixth successive month, matching market expectations.

Stronger-than-expected first-quarter economic growth data might have reduced the urgency for immediate monetary easing even as markets wager more stimulus is likely in coming months to keep growth on an even keel amid an intensifying Sino-U.S. trade war.

Policymakers are also wary of a weakening Chinese yuan and shrinking interest margins at lenders, limiting the scope for easing.

The one-year loan prime rate (LPR) was kept at 3.1 per cent, while the five-year LPR was unchanged at 3.6 per cent.

In a Reuters poll of 31 market participants conducted last week, 27, or 87 per cent, expected no change to either of the rates.

China’s gross domestic product (GDP) grew 5.4 per cent in the first quarter, beating expectations, but markets fear a sharp downturn in the year ahead as US tariff policies pose the biggest risk to the Asian powerhouse in decades.

Export data was yet to capture the impact of higher US tariffs as many factories front-loaded their orders to beat the duties, analysts said.

A string of global investment banks have lowered their projections for China’s economic growth this year and expected more monetary easing measures to underpin the economy.

Xing Zhaopeng, senior China strategist at ANZ, said the steady LPR fixings suggested that policymakers remain in a wait-and-see mode.

“The impact of tariffs is mainly on exports. Given the sound economic growth in the first quarter, it may be easier to introduce targeted measures for export companies,” Xing said.

“The LPR is not seen moving without a cut to the seven-day reverse repo rate first,” economists at ING said in a note.

“Low inflation and strong external headwinds amid escalating tariff threats provide a strong case for easing. But currency stabilisation considerations may prompt the People’s Bank of China to wait until the US Federal Reserve cuts borrowing costs.”

China stocks edged up on Monday as the key lending rates were left unchanged and investors awaited new catalysts to determine market direction in a tit-for-tat trade war with the US

China’s blue-chip CSI300 Index rose 0.2 per cent by the lunch break, while the Shanghai Composite Index gained 0.3 per cent. The Hong Kong market is closed for a local holiday.

China kept benchmark lending rates steady for the sixth successive month on Monday, matching market expectations. Non-ferrous metals rose 2.7 per cent，leading gains onshore, as dollar tumbled and gold soared to record high on trade war concerns.

Meanwhile China’s yuan hovered near a more than two-week high against the dollar on Monday, although uncertainty surrounding Sino-US trade tensions restricted the currency’s upside potential. Traders said the yuan’s movements were following the dollar’s weak performance, as the US currency tumbled after investor confidence in the US economy was shaken by President Donald Trump’s plans to overhaul the Federal Reserve.

By 0342 GMT, the onshore yuan was 0.17 per cent firmer at 7.2868 per dollar, not far from a two-week high of 7.2855 reached on Friday. Its offshore counterpart climbed to a one-week high of 7.2879 per dollar in morning deals before trading at 7.2890 around midday.

However, market participants remained cautious due to ongoing trade tensions between Washington and Beijing, and refrained from pushing the yuan to new highs. China on Monday warned countries against striking a broader economic deal with the United States at its expense, escalating its rhetoric in the intensifying trade war between the world’s two biggest economies.

“If there is positive progress between China and the United States on tariff issues, the yuan exchange rate will gain some support,” said analysts at China International Capital Corporation (CICC).

“Otherwise, the yuan may still face certain depreciation pressure due to cross-border capital outflows,” they said, expecting the yuan to fluctuate between 7.28 and 7.33 per dollar this week.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2 per cent band, at 7.2055 per dollar, 833 pips firmer than a Reuters’ estimate of 7.2888. This month, the PBOC slightly eased its control on the currency, allowing official guidance to weaken past the key threshold of 7.2.

However, it came in stronger than market forecasts, which traders interpreted as an official attempt to keep the yuan steady while allowing some flexibility to counteract tariff shocks.

Nonetheless, the yuan’s value against the its major trading partners, as measured by the CFETS yuan basket index, fell to a new 21-month low of 95.97, according to Reuters calculations based on official data.