China cuts lending benchmarks to revive stuttering economy

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

SHANGHAI  -China cut its benchmark lending rates on Monday, adding to easing measures announced last week, as Beijing steps up efforts to spur credit demand in an economy hobbled by a property crisis and a resurgence of COVID infections.

The one-year loan prime rate (LPR) was lowered by 5 basis points to 3.65 percent at the central bank’s monthly fixing, while the five-year LPR was slashed by a bigger margin of 15 basis points to 4.3 percent.

In a Reuters poll conducted last week, 25 out of 30 respondents predicted a 10-basis-point reduction to the one-year LPR. All of those in the poll also projected a cut to the five-year tenor, including 90 percent of them forecasting a reduction larger than 10 bps.

“The asymmetrical LPR cuts came in line with our expectations,” said Marco Sun, chief financial market analyst at MUFG Bank.

“The policy intention was quite obvious … as the 15 bps cut to the 5-year LPR was meant to boost long-term financing demand.”

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

Sources last week told Reuters 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.

The LPR cut came after the People’s Bank of China (PBOC) surprised the market by lowering the MLF 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.

Goldman Sachs lowered China’s 2022 full-year GDP growth forecast to 3 percent from 3.3 percent previously, far below Beijing’s target of around 5.5 percent. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a recent high profile policy meeting.