China seen cutting key lending benchmarks as economy slows

People walk at the main shopping area in Shanghai, China, March 14, 2023. REUTERS/Aly Song/File photo

SHANGHAI/SINGAPORE   – China is widely expected to cut key lending benchmarks on Tuesday in the first such easing in 10 months, a Reuters survey showed, as authorities seek to shore up a slowing recovery in the world’s second-largest economy.

Recent economic data showed the retail and factory sectors struggling to sustain the momentum seen in the first quarter, raising concerns China’s post-COVID comeback could ground to a halt this year and trigger massive job losses.

The People’s Bank of China (PBOC) lowered short- and medium-term policy rates last week, signaling it is about to embark on another round of loosening in monetary settings in a push to rev up the recovery.

In a poll of 32 market watchers, all participants predicted cuts to both the one-year loan prime rate (LPR) and the five-year tenor.

Twenty-one, or nearly 66 percent, of all respondents expected the one-year LPR – on which most new and outstanding loans are based – to be cut by 10 basis points to 3.55 percent from 3.65 percent. Others projected the cut to range from five to 15 bps.

Meanwhile, 16, or half, of the analysts and traders surveyed by Reuters, said they forecast a deeper cut of at least 15 bps to the five-year LPR, which serves as mortgage reference rate, to stimulate housing demand and prop up the property sector. Another 14 respondents predicted the five-year tenor to be cut by 10 bps to 4.2 percent from 4.3 percent currently.

China last cut both LPRs in August 2022.

“Traditionally, cuts to the medium-term lending facility (MLF) and open market operations (OMO) rates mean that we can expect a similar sized cut to the bank prime loan rate relatively soon,” said David Chao, global market strategist for Asia Pacific at Invesco.

“However, the biggest risk is that rate cuts can be ineffective when households and businesses are excessively conservative, busy deleveraging and paying off debt.”

Chao expects policymaker to introduce additional targeted fiscal and stimulus measures.

China’s cabinet met on Friday to discuss measures to spur growth in the economy and pledged to roll out more policy support.

Despite strong consensus of cuts to the LPR on Tuesday, market participants are divided on the size of the reductions. Some expect the mortgage reference rate could be trimmed by a deeper cut to aid the ailing property sector.

“We are expecting an asymmetric cut with five basis points in one-year LPR and 15 bps in five-year LPR, as the property sector is clearly warranting more policy support,” Citi analysts said in a note.

“We continue to see the July Politburo meeting as a window to watch if more significant moves are following.”

Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the post-COVID recovery was faltering.

The LPR normally charged to banks’ best clients is calculated each month after 18 designated commercial banks submit proposed rates to the central bank.