The People’s Bank of China (PBoC) has kept its Loan Prime Rates steady. The 1-year rate is at 3%, while the 5-year rate stands at 3.5%. These rates have not changed since May and will remain the same through June, July, and August. In 2024, the PBoC updated its monetary policy to improve its effectiveness and boost economic growth. Instead of relying on multiple policy rates like the Medium-term Lending Facility (MLF), the bank has chosen to focus on the 7-day reverse repurchase (repo) rate as its main short-term policy rate. This shift aims to simplify the monetary system and make it easier for the policy to affect the economy.

PBoC Holds Rates Steady

The People’s Bank of China has kept its key loan prime rates unchanged for three months. This stability suggests that there will be less volatility in long-term interest rate derivatives. Investors may find opportunities in strategies like selling strangles on Chinese government bond futures, as rates are likely to stay in a specific range. The market expected this decision, so there won’t be a strong immediate reaction. This choice reflects a cautious approach due to mixed economic signals. For example, July 2025 inflation data showed a low consumer price index of 1.9%. In addition, the latest Caixin Manufacturing PMI barely surpassed 50, indicating sluggish growth. Given this economic situation, the central bank has little reason to tighten its policy, leading us to believe that rates will likely stay the same or decrease. It’s also important to highlight the shift in policy from June 2024, where the 7-day reverse repo rate became the main tool for signaling short-term intention. Therefore, we should focus on derivatives that respond to money market liquidity, such as short-term interest rate swaps and currency options on the Yuan. Any unexpected liquidity actions by the PBoC will likely impact these instruments more than the stable LPR. The stability of the 5-year LPR, which influences mortgages, aims to help the struggling property sector. National data up to July 2025 has shown ongoing year-on-year declines in new home prices in major cities, making a raise in this mortgage-linked rate politically and economically impractical. As a result, traders should consider downside protection on banking or real estate equity indices as relatively inexpensive.

Awaiting Upcoming Economic Data

Looking back, this stability comes after a slight 10 basis point cut in February 2025, indicating that the PBoC is now in a “wait and see” mode. We should closely monitor the upcoming economic data releases for August for any signs of renewed weakness. Negative data could spark speculation about a rate cut before the year ends, with potential opportunities to buy call options on China-related equity indices like the FTSE China A50. Create your live VT Markets account and start trading now.

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