China's real borrowing costs set to stay high in 2024, curbing growth

Leaders cautious on monetary easing in sign that any rate cuts will likely be small

BEIJING - China's real borrowing costs are expected to stay high in 2024 as deflation pressures linger and the central bank will likely avoid aggressive policy rate cuts, posing yet another threat to growth.

While the People's Bank of China (PBOC) has trimmed policy rates and banks have reduced their benchmark lending rates this year to support economic activity, the nation's real lending rates have climbed significantly.

Calculations by Bloomberg News show those rates - which are adjusted for inflation and reflect the actual cost of borrowing funds have topped 4 per cent and may even be near 5 per cent, which would be the highest level since 2016.

That is because consumer and producer prices have fallen at a much faster pace than the average loan rate, which is largely based on changes in the benchmark rates set by the PBOC and the nation's major lenders.

By comparison, the benchmark prime rate on one-year loans is 3.45 per cent roughly 150 basis points lower than what real loan rates are actually estimated to be near.

"China's real interest rates are quite high, and are still rising," said Dr Larry Hu, head of China economics at Macquarie Group.

Along with keeping company borrowing costs elevated, he added that the high rates mean "residents are more inclined to save".