China cut its benchmark interest rate and cut its benchmark mortgage loan by a wider margin on Monday, adding to last week’s easing measures, as Beijing ramps up efforts to revive an economy battered by an asset crisis and a renewed surge in COVID cases. The People’s Bank of China (PBOC) is walking a tightrope in its efforts to revive growth. Too much stimulus could increase inflationary pressures and the flight of venture capital as the Federal Reserve and other economies aggressively raise interest rates.
However, weak credit demand is forcing the PBOC’s hand as it tries to keep China’s economy afloat. The one-year prime rate (LPR) was cut by 5 basis points to 3.65% at the central bank’s monthly fix, while the five-year LPR was cut by 15 basis points to 4.30%. The annual LPR was last cut in January. The five-year maturity, which was last cut in May, affects home mortgage prices. Overall, from all the recent PBOC statements, we get the impression that policy is easing, but not dramatically,” said Sheana Yue, China economist at Capital Economics.
“We expect two more 10 basis point rate cuts by the PBOC in the remainder of this year and continue to forecast a cut in the reserve requirement ratio (RRR) next quarter.” The LPR cut comes after the PBOC last week surprised markets by cutting the medium-term lending facility (MLF) rate and another short-term liquidity tool as a raft of recent data showed the economy was losing momentum amid slowing global growth and rising borrowing costs.In a poll last week, 25 of 30 respondents predicted a 10 basis point cut in the annual LPR. All survey participants also expected a reduction in the five-year duration, including 90% predicting a reduction of more than 10 basis points. Concerns about widening political divergence with other major economies have pushed the Chinese yuan to near two-year lows. The onshore yuan last traded at 6.8232 per dollar.
LOSS OF MOMENTUM
China’s economy, the world’s second largest, narrowly avoided a contraction in the second quarter as widespread lockdowns and an asset crisis took a heavy toll on consumer and business confidence. Beijing’s strict “zero COVID” strategy remains a drag on consumption, and cases have resurfaced in recent weeks. In addition, the chances of a strong recovery in China are being undermined by slowing global growth and persistent supply chain issues.
A series of data released last week showed the economy unexpectedly slowed in July, prompting some global investment banks, including Goldman Sachs and Nomura, to revise their full-year GDP growth forecasts for China. Goldman Sachs cut its forecast for China’s full-year 2022 GDP growth to 3.0% from 3.3% previously, well below Beijing’s target of around 5.5%. In a tacit acknowledgment of the problem in meeting the GDP target, the government omitted to mention it in a recent high-profile policy meeting.
The asymmetric reduction in LPR was in line with our expectations,” said Marco Sun, chief financial market analyst at MUFG Bank. “The policy intent was quite clear … as the 15 basis point cut to the 5-year LPR was intended to support demand for long-term funding.” A deeper cut in the benchmark mortgage rate underscores policymakers’ efforts to stabilize the sector after consumer demand was hit by a string of bad loans among developers and a slump in home sales.
Sources told last week that China would underwrite new bond issues on the mainland from a select few private developers to support the sector, which accounts for a quarter of the nation’s GDP.The LPR cut was necessary, “but the size of the cut was not enough to stimulate demand for funding,” said Xing Zhaopeng, chief China strategist at ANZ. Xing expects that the one-year LPR could decrease further.
