^{Photo: Mint}

Policy Pause Reflects Delicate Balancing Act

People’s Bank of China left its benchmark lending rates unchanged on Tuesday, underscoring Beijing’s cautious approach as it tries to support a slowing economy without triggering excessive currency volatility.

The central bank maintained the one-year loan prime rate at 3 percent and the five-year rate at 3.5 percent, marking the tenth consecutive month without a change. The decision was widely anticipated by markets but highlights how policymakers are prioritizing financial stability while assessing whether earlier stimulus measures are gaining traction.

Why the Loan Prime Rates Matter

The one-year loan prime rate acts as the primary reference for most corporate and household borrowing, influencing everything from working capital loans to consumer credit. Meanwhile, the five-year rate serves as the key benchmark for mortgages, making it crucial for the housing sector, which remains a major drag on growth.

Keeping both rates steady suggests authorities are wary of fueling further debt buildup while still leaving room for targeted easing through other tools such as liquidity injections or fiscal measures.

Growth Momentum Continues to Slow

Recent economic data paints a picture of uneven recovery. China’s economy expanded about 4.5 percent year over year in the final quarter of last year, its weakest pace since the reopening period following pandemic restrictions.

Domestic demand remains fragile. Retail sales growth slipped to just 0.9 percent in December, the slowest pace in roughly three years, as households remain cautious amid job insecurity and subdued income expectations. At the same time, the GDP deflator has stayed negative for nearly three years, signaling persistent deflationary pressure across the economy.

The prolonged downturn in the property sector continues to weigh heavily on sentiment, with lower home prices and reduced construction activity dampening consumer confidence and local government revenues.

A Stronger Yuan Enters the Equation

Alongside the rate decision, officials have signaled greater tolerance for a gradual appreciation of the Chinese currency. The offshore yuan has strengthened from around 6.97 per U.S. dollar earlier in the year to roughly 6.89, supported partly by a softer dollar environment and policy signals favoring stability.

China manages its currency within a controlled trading band of plus or minus 2 percent around a daily midpoint. In recent weeks, authorities have set stronger fixings, briefly pushing the reference rate below the symbolic 7-per-dollar threshold for the first time in several years.

While a firmer currency can help contain capital outflows and improve confidence, it also poses challenges for exporters already grappling with softer global demand and trade frictions.

Policy Focus Shifts Toward Consumption

With manufacturing and property struggling to regain momentum, policymakers are increasingly emphasizing services and domestic consumption as key growth drivers. Initiatives aimed at boosting spending on tourism, healthcare, and elderly care are gaining traction as authorities attempt to rebalance the economy away from heavy reliance on investment and exports.

Economists expect additional targeted measures—such as credit support for small businesses and selective fiscal spending—to complement the current monetary stance rather than broad rate cuts.

Outlook for Rates and Currency

Most forecasts suggest China will maintain a flexible but cautious policy path through the year. Currency strategists broadly expect the yuan to trade within a range of roughly 6.85 to 7.25 per dollar, depending on global interest rate trends and domestic growth performance.

The key uncertainty is how policymakers prioritize their objectives if economic conditions deteriorate further. Any shift toward aggressive stimulus could put renewed pressure on the currency, while continued emphasis on stability would likely keep rates anchored for longer.