- The People's Bank of China (PBOC) kept the one-year loan prime rate at 3.00% and the five-year rate at 3.50%, unchanged for the seventh consecutive meeting.

- November's economic data came in weaker than expected: retail sales rose by only 1.3% (compared to expectations of 2.8%), and industrial output by 4.8% (compared to 5.0%).

- The collapse of the real estate sector is deepening, with new home prices falling by 1.2% in major cities like Beijing, Guangzhou, and Shenzhen, and resale home prices dropping by 5.8%.

- The yuan remains weak at around 7.04 against the dollar, despite a temporary easing of trade tensions with Washington.

- Jason Schenker (President of Prestige Economics) expects the yuan to remain near 7.03 by the end of 2026, likely not sustaining any significant strengthening.

### Decision Details

The People's Bank of China announced on Monday that it would keep the loan prime rate (LPR) unchanged, where the one-year rate sets the price for most new loans, while the five-year rate affects mortgage prices.

This decision comes amid clear signs of economic weakness, especially in the retail, industrial, and real estate sectors.

### The collapse of the real estate sector deepens with falling prices

The real estate sector remains in turmoil. Investment in fixed assets (including infrastructure and real estate) fell by 2.6% from January to November compared to the previous year, more than expected (2.3%).

Pain is widespread: new home prices dropped by 1.2% in November in Beijing, Guangzhou, and Shenzhen, while resale home prices fell by 5.8% from the previous year. No part of the real estate market is holding up.

Professor Eswar Prasad from Cornell University said: "Some stimulus will help," but warned that "monetary policy may not have a significant impact" with the weak private sector. He added: "With the slowdown in growth momentum, they will have to turn on the stimulus tap, some monetary stimulus perhaps, and preferably more fiscal stimulus, but that needs to be wrapped up with broader reforms."

The Chinese Ministry of Finance is not oblivious to this. Earlier in December, it announced plans to issue very long-term special government bonds in 2025 to support major infrastructure projects. Officials also promised to push measures to boost consumer spending, attempting to prevent a deepening of the contraction. However, investors are not enthusiastic.

### The yuan remains weak despite a temporary trade easing with Washington

The recent trade arrangement with Washington gives China a brief respite. Tariffs on Chinese exports have been suspended, which could support export growth in 2025. The country still hopes to achieve its growth target of "around 5%", but nothing is guaranteed. Domestic demand remains weak.

On the currency front, the yuan has not shown significant strength. The domestic price remained stable at 7.04 against the dollar on Monday, while the external price weakened. Jason Schenker said he expects the yuan to temporarily dip below 7.00 during the next six months, but he doubts it will stay there.

"I would be surprised if it stays below seven for a sustained period. It may be viewed as a challenge and a risk in China." He now sees the yuan ending 2026 around 7.03, slightly stronger than his previous forecast of 7.05 in November.

Schenker does not buy the bullish forecasts being promoted by some banks. Goldman Sachs, for example, believes the yuan could reach 6.85 in 12 months.

However, this view contrasts with calls within China from former central bank officials and economists advocating for a stronger yuan. Their argument? It could help rebalance the economy and reduce trade pressures.

(This decision aligns with market expectations and comes amid ongoing economic weakness, with anticipation for greater fiscal stimulus in 2026. Asian markets rose today nonetheless, supported by monetary stability.

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