China cuts lending benchmarks to revive faltering economy

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

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SHANGHAI, Aug 22 (Reuters) – China cut its key interest rate and mortgage reference by a larger margin on Monday, adding to last week’s easing measures as Beijing ramps up efforts to revive an economy hit by a housing crisis and a resurgence in the economy Covid cases.

The one-year LPR was cut 5 basis points to 3.65% at the central bank’s monthly fixing, while the five-year LPR was cut 15 basis points to 4.30%.

The one-year LPR was last reduced in January. The five-year term, last reduced in May, is affecting home mortgage pricing.

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In a Reuters poll conducted last week, 25 out of 30 respondents predicted a 10 basis point reduction in the one-year LPR. All respondents also predicted a five-year maturity cut, including 90% of those who predicted a cut of more than 10 basis points. Continue reading

“The asymmetric LPR cuts were in line with our expectations,” said Marco Sun, chief financial markets analyst at MUFG Bank.

“Policy intent was pretty obvious…as cutting the 5-year LPR by 15 basis points should boost long-term funding demand.”

Monday’s deeper cut in the benchmark mortgage rate underscores policymakers’ efforts to stabilize the housing sector after a series of defaults by developers and a slump in home sales.

Sources told Reuters last week that China will guarantee new onshore bond issuance by a select few private developers to support the sector, which accounts for a quarter of the national GDP. Continue reading

FRAIL DATA CHALLENGES PBOC

The LPR cut came after the People’s Bank of China (PBOC) surprised the market last week by cutting the MLF rate and another short-term liquidity tool as authorities sought to boost credit demand in a faltering economy. Continue reading

A series of data also released last week showed that the economy slowed unexpectedly in July, prompting some global investment banks including Goldman Sachs and Nomura to revise their full-year gross domestic product (GDP) growth forecasts for China to be revised below.

Goldman Sachs cut China’s full-year 2022 GDP growth forecast to 3.0% from a previous 3.3%, well below Beijing’s target of around 5.5%. In a tacit admission of the challenge of meeting the GDP target, the government failed to mention it at a recent high-profile political meeting.

The LPR cut was necessary, “but the scale of the cut was not enough to spur funding demand,” said Xing Zhaopeng, senior China strategist at ANZ.

Xing assumes that the one-year LPR could be further reduced.

The PBOC is walking a fine line in its efforts to revive the economy. Offering too much stimulus could increase inflationary pressures and risk capital flight as the Federal Reserve and other economies aggressively raise interest rates. Continue reading

China’s economy, the second-biggest in the world, narrowly avoided a contraction in the second quarter as widespread lockdowns and a housing crisis weighed heavily on consumer and business confidence.

Beijing’s strict “zero-COVID” strategy continues to weigh on consumption, and cases have rebounded in recent weeks. Adding to the gloomy sentiment, a slowdown in global growth and ongoing supply chain issues are undermining the chances of a strong rebound in China.

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

Our standards: The Thomson Reuters Trust Principles.

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