China cuts lending benchmarks to revive stuttering economy

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SHANGHAI — China cut its benchmark lending rate and lowered the mortgage reference by a bigger margin on Monday, 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 cases.

The one-year loan prime rate (LPR) was lowered by 5 basis points to 3.65% at the central bank’s monthly fixing, while the five-year LPR was slashed by 15 basis points to 4.30%.

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

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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% 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.

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FRAIL DATA CHALLENGES PBOC

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 3.0% from 3.3% previously, far below Beijing’s target of around 5.5%. 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.

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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.

Xing expects the one-year LPR could be cut further.

The PBOC is walking a tight rope in its efforts to revive the economy. Offering too much of stimulus could add to inflation pressures and risk capital flight as the Federal Reserve and other economies raise interest rates aggressively.

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

Beijing’s strict ‘zero-COVID’ strategy remains a drag on consumption, and over recent weeks cases have rebounded again. Adding to the gloom, a slowdown in global growth and persistent supply-chain snags are undermining chances of a strong revival in China. (Reporting by Winni Zhou and Brenda Goh; Editing by Shri Navaratnam)