China Holds Rates Despite Economic Slump

Global investors watching for a lifeline from the People’s Bank of China (PBOC) were left waiting this week. For the seventh consecutive month, China’s central bank has elected to keep its benchmark lending rates on hold, maintaining a cautious stance even as the world’s second-largest economy shows signs of deepening fatigue.

The decision to hold the one-year loan prime rate (LPR) at 3 per cent and the five-year rate at 3.5 per cent was largely anticipated by market consensus. However, the context surrounding this inaction is increasingly grim. The one-year rate, which influences corporate loans, and the five-year rate, a reference for mortgages, remain unchanged at a time when domestic demand appears to be evaporating. For capital markets, this signals that Beijing may be reaching the limits of what monetary policy alone can achieve without broader structural reform.

The central bank’s decision stands in stark contrast to the downbeat economic data released for November. The numbers paint a picture of a consumer base that has retreated into a shell. Retail sales managed a meagre rise of 1.3 per cent from a year earlier, a figure that sharply missed the median forecast of 2.8 per cent and marked a deceleration from the previous month.

Industrial production, often the engine room of the Chinese economy, also sputtered. Output climbed 4.8 per cent, missing estimates for a 5 per cent jump and recording its weakest growth since August 2024. For equity investors, particularly those exposed to luxury goods or industrial commodities, these figures suggest that the deflationary pressures within China are not just persisting but potentially accelerating.

The core of the malaise remains the protracted slump in the real estate sector, which continues to act as a deadweight on the broader economy. Fixed asset investment, a metric heavily weighted by property development, contracted by 2.6 per cent over the first eleven months of the year compared to 2024. This contraction was sharper than economists had predicted, highlighting the depth of the crisis.

Price action in the housing market offers little comfort. New home prices in tier-1 powerhouses—Beijing, Guangzhou, and Shenzhen—fell 1.2 per cent, while the resale market saw a significant drop of 5.8 per cent year-on-year. With property traditionally serving as the primary store of wealth for Chinese households, this erosion of equity is directly feeding the weak consumption data.

The continued pause in monetary easing has reignited the debate over the efficacy of rate cuts in a liquidity trap. Eswar Prasad, professor of trade policy and economics at Cornell University, noted that while "some stimulus will help," the current environment poses challenges. "With growth momentum weakening, they’re going to have to turn on the stimulus taps, some monetary stimulus, perhaps, and ideally a little more fiscal stimulus, but that really needs to be packaged with some broader reforms," Prasad stated.

Looking ahead to 2026, the strategy appears to be shifting toward fiscal levers. The finance ministry has outlined plans to issue ultra-long-term special government bonds to fund infrastructure, aiming to offset the private sector slump. Furthermore, a temporary trade truce with Washington, suspending prohibitive tariffs, offers a glimmer of hope for the export sector to help achieve the "around 5 per cent" growth target. However, until the property sector stabilises, global markets will likely remain wary of the Dragon’s ability to roar back.