China Expected to Leave Lending Benchmarks Unchanged Amid Rate Risks

• China is widely expected to leave its benchmark lending rates unchanged on Friday, a Reuters poll showed, as falling yields, shrinking net interest margins, and a weakening yuan create limits for immediate monetary easing.
• Yield differentials between China and the U.S. hit their widest in 22 years this week, dragging the yuan to its weakest in over a year, despite a Federal Reserve interest rate cut.
• While rapid declines in Chinese yields have prompted the central bank to warn against rate risks, a pledge by the Politburo to switch to an "appropriately loose" monetary policy stance next year has heightened market expectations for more easing in coming months.
• The loan prime rate (LPR), normally charged to banks' best clients, is calculated each month after 20 designated commercial banks submit proposed rates to the People's Bank of China (PBOC).
• In a Reuters survey of 27 market watchers conducted this week, all respondents expected both the one-year and five-year LPRs to remain steady. "The central bank has just warned (against interest rate risk), it seems a bit inappropriate to cut interest rates right after that," said a trader at a Chinese bank.
• China's central bank urged financial institutions to guard against interest rate risks when trading in bonds, signalling discomfort over a recent buying frenzy that has helped drive yields sharply lower.

(Source: Reuters)