China cuts lending benchmarks to revive faltering economy

FILE PHOTO: Employees work on the production line for vehicle components during a government-organized media tour of 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

SHANGHAI, Aug 22 (Reuters) – China cut its benchmark lending rate and lowered its mortgage benchmark by a wide margin on Monday, adding to last week’s easing, as Beijing steps up efforts to revive an economy hobbled by a property crisis and a rebound of Covid cases.

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

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 fixing on Monday, while the five-year LPR was reduced by 15 basis points to 4.30%.

The one-year LPR was last reduced in January. The five-year term, which was last lowered in May, affects the pricing of mortgages.

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

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

The LPR cuts come after the PBOC surprised markets last week by lowering 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. read more

Shares of Chinese developers listed in Hong Kong (.HSMPI) rose 1.7%, while China-listed property shares (.CSI000952) were relatively flat in morning deals.

But concerns over growing policy divergence with other major economies dragged the Chinese yuan to near two-year lows. The onshore yuan last traded at 6.8232 per dollar.

In a Reuters poll conducted last week, 25 of 30 respondents predicted a 10-basis-point cut to the one-year LPR. All those in the poll also forecast a cut to the five-year period, including 90% of those who predicted a reduction greater than 10 bps. read more

TEST TIME FOR PBOC

China’s economy, the world’s second largest, narrowly avoided contracting in the second quarter as widespread lockdowns and a property crisis took a toll on consumer and business confidence.

Beijing’s strict “zero COVID” strategy remains a drag on consumption, and in recent weeks things have picked up again. Adding to the gloom, a slowdown in global growth and persistent supply chain issues are undermining the prospects for a strong revival in China.

A series of data 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 GDP growth forecasts for China.

Goldman Sachs lowered China’s full-year GDP growth forecast for 2022 to 3.0% from 3.3% previously, well below Beijing’s target of around 5.5%. In a tacit acknowledgment of the challenge of meeting the GDP target, the government omitted a mention of it in a recent high-profile policy meeting.

The deeper cut in benchmark mortgage rates underscores policymakers’ efforts to stabilize the property sector after a string of developer defaults and a slowdown in home sales hammered consumer demand.

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

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

Goldman Sachs economists also predicted more easing, but noted that policymakers faced a test.

The economist said the PBOC may be in “no rush to deliver more rate cuts,” due to “rising food prices and potential spillovers from developed markets’ monetary tightening.”

(This story restated to correct typographical error referring to Goldman Sachs in penultimate paragraph)

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

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