Reuters: China slashed its benchmark lending rate and mortgage reference by a larger margin on Monday, adding to last week’s softening steps. Beijing is trying to bring life back to an economy that has been hurt by a real estate crisis and a rise in COVID cases.
The PBOC walks a tightrope to reignite growth. Too much stimulus could increase inflation and risk capital flight when the Fed and other economies boost interest rates.
Weak credit demand forces the PBOC to stabilise China’s economy.
The one-year loan prime rate (LPR) was dropped by 5 basis points to 3.65% on Monday, while the five-year LPR was trimmed by 15 basis points to 4.30.
Last January, the one-year LPR was cut. The five-year term, last cut in May, affects mortgage pricing.
All the PBOC’s recent announcements suggest policy is being loosened, but not significantly, says Capital Economics’ Sheana Yue.
“We expect two further 10 bps PBOC rate reductions this year and an RRR drop next quarter.”
Last week, the PBOC shocked the markets by cutting the MLF rate and another short-term liquidity instrument. Recent data showed that the economy was losing steam because global growth was slowing and borrowing costs were going up in a number of developed countries.
Hong Kong-listed Chinese developer shares increased 1.7%, while China-listed property equities were unchanged.
The Chinese yuan fell because of widening policy divergences with other major economies. Onshore, the yuan was 6.8258 per dollar.
25 of 30 Reuters poll respondents projected a 10-basis-point one-year LPR cut last week. All of the people who took the poll thought that the five-year tenor would go down, and 90% of them thought it would go down by more than 10 bps.
PBOC testing
China’s economy, the world’s second largest, just escaped shrinking in the second quarter because to COVID-19 lockdowns and a housing crisis.
Beijing’s stringent ‘zero-COVID’ goal has slowed consumption in recent weeks. Slow global growth and supply-chain bottlenecks undermine China’s chances of a substantial recovery.
The economy got worse than expected in July, which made Goldman Sachs (NYSE:GS) and Nomura lower their predictions for China’s GDP growth for the whole year.
Goldman Sachs cut China’s 2022 GDP growth prediction to 3.0% from 3.3%, below Beijing’s aim of 5.5%. The government left the GDP goal out of a recent policy discussion, which was a tacit admission that it would be hard to reach.
The steeper decrease in the mortgage reference rate underscores officials’ efforts to stabilise the property industry following a run of developer defaults and a slump in home sales.
Yue of Capital Economics said that the slow demand for loans shows that people have lost faith in China’s zero-COVID plan and the property market.
“Monetary policy can’t fix these problems.”
Reuters reported last week that China would guarantee fresh onshore bond issues by a few private developers, but The sector accounts for a fourth of the national GDP.
The LPR cut was important, “but the scale of the reduction wasn’t enough to encourage financing demand,” said ANZ’s Xing Zhaopeng, who expects the one-year LPR to be slashed further.
Goldman Sachs economists projected additional easing but said policymakers faced a test.
Experts say that the PBOC may not be in a hurry to lower interest rates again because food prices are going up and there may be spillover effects from the tightening of monetary policy in developed markets.
