China keeps lending rates on hold as room for monetary easing narrows

China maintained its key lending rates at 3.00% for a 16th month in a row on Sunday, according to Reuters. The five-year prime rate also stayed at 3.50%. The decision mirrored expectations, with all 21 surveyed economists predicting no change. This move came after the U.S. Federal Reserve raised interest rates last week and hinted at additional hikes.

The widening gap between U.S. and Chinese monetary policy is evident, with the yield premium on U.S. Treasuries over Chinese sovereign debt nearing a record high. China's own constraints limit further easing, as weak credit demand and declining profitability among banks pose challenges. The People's Bank of China's governor, Pan Gongsheng, noted that slower loan growth is becoming the norm due to shrinking property and local government sectors needing less credit than emerging industries can provide.

Strategist Serena Zhou of Mizuho Securities believes the likelihood of broad-based monetary easing in the fourth quarter has declined, especially with the Federal Reserve's more hawkish stance. Economist Jacqueline Rong of BNP Paribas anticipates China nearing the end of its rate-cutting cycle, predicting rates to remain unchanged for the rest of 2026.

She cites tight net interest margins at Chinese banks and a shift from deflation to mild inflation as reasons for this view. A weaker-than-expected economic growth could still lead to another rate cut.