China Holds Rates Steady for 9th Month Despite 40-Month Deflation

China held its benchmark lending rates unchanged for the ninth consecutive month, as the central bank's monetary policy pace continues to lag market expectations despite leadership's pledges to boost domestic demand.

The People's Bank of China announced Monday it would maintain the five-year loan prime rate at 3.5% and the one-year LPR at 3.0%. The decision matched unanimous forecasts from 22 market experts surveyed by Reuters.

The PBOC last cut rates by 0.1 percentage point each in May 2024, when U.S. tariff pressure intensified. While authorities lowered re-lending and rediscount rates by 0.25 percentage point last month, analysts say the impact on domestic demand remains limited compared to LPR cuts.

Property Slump Weighs on Consumption

China's property market downturn, now in its third year, has severely dampened consumer sentiment. Real estate accounts for over 70% of household assets.

Property development investment fell 17.2% last year. Fixed-asset investment dropped 3.8%—the first decline since records began 29 years ago.

The consumer price index rose just 0.2% year-on-year in December, missing both the 0.4% forecast and prior month's 0.8% reading. The producer price index fell 1.4%, marking 40 consecutive months of decline and persistent deflationary pressure.

Global Tensions Rise Over Export Strategy

Western nations have criticized Chinese manufacturers for pivoting to low-price exports amid weak domestic demand, disrupting global markets.

"As the world's second-largest economy, China is too big to rely on exports as a source of growth," IMF Managing Director Kristalina Georgieva said. "Continued reliance on export-led growth risks further aggravating global trade tensions."

Banks' Margins at Record Lows

Analysts expect no rate cuts in the first quarter. Tianfeng Securities noted the central bank retains room to cut the reserve requirement ratio and policy rates but is using this flexibility to manage market expectations.

Several factors constrain PBOC action. Commercial banks' net interest margins fell to a record low of 1.42% in the second quarter of 2024, well below the regulator's 1.8% floor.

Currency considerations also weigh on the decision. The yuan has strengthened against the dollar, trading at 6.897 per dollar Monday versus approximately 7.3 a year ago. Authorities recently highlighted President Xi Jinping's 2023 remarks favoring a "strong yuan" through state media.

All Eyes on March's Two Sessions

Market attention now turns to China's annual parliamentary meetings beginning March 4, where Beijing will announce its GDP growth target.

Consensus expectations point to a conservative target of 4.5% to 5%, down from the approximately 5% goal maintained in recent years.

The IMF projected last week that China's growth would slow from 5% in 2024 to 4.5% this year, citing "long-term tariff effects and trade uncertainty."

Zhou Tianyong, director of the National Economic Engineering Research Institute at Dongbei University of Finance and Economics and former deputy director of the Central Party School's International Strategy Research Institute, warned that without market reforms, "annual potential growth will be only 2.5% during the 15th Five-Year Plan period (2026-2030) and the following decade."