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China cuts benchmark lending rates to revive stuttering economy

BEIJING (BLOOMBERGm REUTERS) – China cut its benchmark lending rates on Monday (Aug 22), adding to last week’s easing measures, as Beijing boosts efforts to revive an economy hobbled by a property crisis and a resurgence of Covid-19 cases.

The one-year loan prime rate (LPR), which serves as a benchmark for corporate loans, was lowered by 5 basis points to 3.65 per cent at the central bank’s monthly fixing. It was last reduced in January.

The five-year LPR, which is used to price mortgages, was cut from 4.45 per cent to 4.3 per cent. It was last lowered in May.

The deeper cut to the mortgage reference rate on Monday underlines efforts by policymakers to stabilise the property sector after a string of defaults among developers and a slump in home sales.

The LPR cut came after the People’s Bank of China (PBOC) surprised the market by lowering the medium-term lending facility rate and another short-term liquidity tool last week, as authorities looked to boost credit demand in a stuttering economy.

A raft of data, also released last week, showed the economy unexpectedly slowed in July and prompted some global investment banks, including Goldman Sachs and Nomura, to revise down their full-year gross domestic product (GDP) growth forecasts for China.

Lower borrowing costs could help spur demand for loans, though they are unlikely to reverse the sharp slump in consumer and business confidence triggered by turmoil in the property market and the stop-start reopening of the economy under the Covid-19-zero strategy, say analysts.

The LPR cut was necessary, “but the size of the reduction was not enough to stimulate financing demand,” said Xing Zhaopeng, senior China strategist at ANZ.
Mr Xing expects the one-year LPR could be cut further.

“All told, the impression we get from all the PBOC’s recent announcements is that policy is being eased but not dramatically,” said Sheana Yue, China economist at Capital Economics.

“We anticipate two more 10 bps cuts to the PBOC policy rates over the remainder of this year and continue to forecast a reserve requirement ratio (RRR) cut next quarter.

Banks are flush with cash, but are either unwilling or finding it difficult to finance projects. Credit demand weakened sharply in July, prompting some economists to warn of a “liquidity trap” in China, where low interest rates fail to spur lending in the economy. As the property crisis deepens, hundreds of thousands of home buyers have gone on a mortgage strike, and more households are saving up and avoiding taking on debt.

The loan prime rates are based on interest rates that 18 banks offer their best customers and are quoted as a spread over the central bank’s rate on its one-year policy loans, known as the medium-term lending facility.

Beijing has taken other steps to ease market panic and step up financing to the real estate sector. The PBOC and two ministries announced on Friday that special loans will be offered through policy banks to ensure that property projects are delivered to buyers.