China lowers credit benchmarks to revive faltering economy

FILE PHOTO: Employees work on the vehicle component production line during a government-organized media tour to a factory of German engineering group Voith, following the outbreak of the coronavirus disease (COVID-19) in Shanghai, China, July 21, 2022. REUTERS/ Aly Song

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SHANGHAI, Aug. 22 (Reuters) – China cut its benchmark rate on Monday and cut its mortgage reference by a wider margin, adding to last week’s easing measures as Beijing ramps up its efforts to revive an economy hampered by a real estate crisis and a resurgence of Covid cases.

The People’s Bank of China (PBOC) is on a tightrope in its efforts to revive growth. Offering too much stimulus could add to inflationary pressures and the risk of capital flight as the Federal Reserve and other economies aggressively raise interest rates. read more

However, weak credit demand is forcing the PBOC to maintain the Chinese economy.

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The one-year bond prime rate (LPR) was cut by 5 basis points to 3.65% on Monday at the central bank’s monthly fixing, while the five-year LPR was cut by 15 basis points to 4.30%.

The one-year LPR was last lowered in January. The five-year maturity, which was last reduced in May, is impacting the pricing of residential mortgages.

“Overall, the impression we are getting from all the recent announcements from the PBOC is that the policy is easing, but nothing dramatic,” said Sheana Yue, China economist at Capital Economics.

“We expect two more 10-bp cuts in PBOC interest rates during the remainder of this year and continue to forecast a cut in reserve requirements (RRR) next quarter.”

The LPR cuts come after the PBOC surprised markets last week by cutting medium-term bond (MLF) rates and another short-term liquidity tool, as a series of recent data showed the economy was losing momentum due to slowing global growth and rising borrowing costs. read more

Shares of Chinese developers listed in Hong Kong (.HSMPI) rose 1.7%, while China-listed real estate stocks (.CSI000952) were relatively stable in morning deals.

But concerns about widening policy differentials with other major economies dragged the Chinese yuan to a nearly two-year low. The onshore yuan last traded at 6.8232 per dollar.

In a Reuters poll conducted last week, 25 out of 30 respondents predicted a 10-bp reduction to the one-year LPR. All in the poll also predicted a five-year maturity cut, including 90% of those forecasting a cut of more than 10 basis points. read more


The Chinese economy, the world’s second largest, narrowly avoided contraction in the second quarter as widespread lockdowns and a real estate crisis took a heavy toll on consumer and business confidence.

Beijing’s strict ‘zero-COVID’ strategy continues to hold back consumption and cases have recovered in recent weeks. In addition to the gloom, a slowdown in global growth and ongoing supply chain problems are undermining the chances of a strong rebound in China.

A series of data released last week showed the economy slowed unexpectedly in July, prompting some global investment banks, including Goldman Sachs and Nomura, to review their full-year GDP growth forecasts for China.

Goldman Sachs cut China’s full-year 2022 GDP growth forecast from 3.3% previously to 3.0%, well below Beijing’s target of about 5.5%. In tacit admission of the challenge to meet the GDP target, the government made no mention of it at a recent high-profile policy meeting.

The deeper cut in benchmark mortgage rates underscores policy makers’ efforts to stabilize the real estate sector after a series of developer defaults and a slump in home sales put consumer demand to the test.

Sources told Reuters last week that China will guarantee new onshore bond issues by a few select private developers to support the sector, which accounts for a quarter of the national GDP. read more

The LPR cut was necessary, “but the magnitude of the cut was not enough to boost funding demand,” said Xing Zhaopeng, China’s senior strategist at ANZ, who expects the one-year LPR to be cut further.

Goldman Sachs economists also forecast more easing, but noted that policymakers were facing a difficult time.

The economist said the PBOC may not be “rushing through more rate cuts” because of “rising food prices and potential spillovers from monetary policy tightening in developed markets.”

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Reporting by Winni Zhou and Brenda Goh; Editing by Shri Navaratnam

Our Standards: The Thomson Reuters Trust Principles.

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