China's Economic Stimulus Kicks Off... 'De Facto Benchmark Rate' LPR Cut for First Time in 20 Months (Update)

People's Bank of China
Photo by Reuters Yonhap News

[Asia Economy Reporter Park Byung-hee] The People's Bank of China, the central bank of China, has cut the loan prime rate (LPR), the de facto benchmark interest rate, for the first time in 20 months. The LPR cut is expected to be an important signal indicating that China's economic policy is shifting toward stimulus.

On the 20th (local time), the People's Bank of China announced that the 1-year LPR for December was set at 3.8%, down 0.05 percentage points from 3.85% in the previous month. This is the first LPR cut since April last year. The 5-year LPR remained unchanged at 4.65%.

The LPR is the lending rate offered by 18 major Chinese banks to their best customers and has served as the de facto benchmark interest rate since the policy reform in 2019.

At the end of last month, Liu Sujin, a monetary policy committee member of the People's Bank of China, warned of the risk of quasi-stagflation in the Chinese economy. Amid growing concerns about the economic slowdown within China, signs are emerging that China is fully shifting its economic policy direction toward stimulus.

Earlier, China announced a reserve requirement ratio cut on the 6th, and the reduced reserve requirement ratio, lowered by 0.5 percentage points, began to be applied from the 15th. This was the second reserve requirement ratio cut this year following the one in July.

China's economic growth rate sharply slowed from 18.3% in the first quarter to 7.9% in the second quarter and 4.9% in the third quarter, with forecasts suggesting it will fall below 4% in the fourth quarter.