On October 21, the People's Bank of China (PBOC) authorized the National Interbank Funding Center to release the latest Loan Prime Rate (LPR). Both the 1-year and 5-year LPR rates were lowered by 25 basis points (bps), with the 1-year LPR now at 3.1% and the 5-year LPR at 3.6%.

Several industry experts believe that this LPR reduction will lead to a significant decrease in lending rates for businesses and individuals, stimulating demand for financing in the real economy, boosting consumption and investment, and enhancing economic growth momentum. It is also expected to moderate inflation and contribute to the stabilization of the real estate market, supporting the completion of annual economic and social development goals.

Last month, the Medium-term Lending Facility (MLF) rate was cut by 30 bps. On September 25, the PBOC announced a ¥300 billion MLF operation with a 1-year term, a maximum bidding rate of 2.30%, a minimum bidding rate of 1.90%, and a final winning rate of 2.00%, down by 30 bps from the previous level.

Additionally, the second round of deposit rate cuts for the year has already taken place. Starting on October 18, China’s six largest banks collectively reduced deposit rates, marking the sixth rate cut since September 2022. Compared to the previous round, this adjustment is more significant. For example, the five major banks—ICBC, ABC, BOC, CCB, and BoCom—lowered their listed demand deposit rates by 5 bps to 0.1%, while term deposits across various durations were reduced by 25 bps. As a result, the listed rates for 3-month, 6-month, 1-year, and 2-year term deposits now stand at 0.8%, 1%, 1.1%, and 1.2%, respectively, while the 3-year and 5-year rates have dropped to 1.5% and 1.55%. Meanwhile, Postal Savings Bank has slightly higher rates than the other major banks, with its 6-month and 1-year term deposit rates standing 1 bps and 2 bps higher, respectively.

Regarding the reasons behind the LPR cut, on one hand, at a press conference held by the State Council Information Office on September 24, the PBOC announced a reduction in the central bank's policy rate, cutting the 7-day reverse repo rate by 0.2 percentage points, from 1.7% to 1.5%, to guide the LPR and deposit rates downward. The 7-day reverse repo rate has increasingly served as a policy benchmark for the LPR, making the LPR reduction this month expected.

On the other hand, the extent of the LPR cut, which exceeded the drop in the policy rate, may be related to the recent significant reduction in bank deposit rates, the 30 bps cut in the September MLF operation, and the Reserve Requirement Ratio (RRR) cut, all of which have contributed to a substantial decline in banks' funding costs.

Ming Ming, chief economist at CITIC Securities, further stated that during the October 12 press conference on "Enhancing the Counter-Cyclical Adjustment of Fiscal Policy and Promoting High-Quality Economic Development," Finance Minister Lan Fo'an mentioned that special government bonds would be issued to support major state-owned commercial banks in replenishing their core Tier 1 capital, addressing the narrowing interest rate spreads banks face while supporting the real economy. This indicates a strong focus from the central government on maintaining banks' profitability and interest rate margins, with deposit rate cuts preceding the LPR cut reflecting this approach.

Although this may be the last rate cut for this year, and the room for further action on pricing tools is relatively limited, Ming noted that the effectiveness of this rate cut in boosting credit demand will be closely monitored, and further rate cuts cannot be ruled out for next year.

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