In a bid to counter the post-Covid growth slowdown, China the world’s second-largest economy cut two benchmark interest rates, following several similar measures in recent days as authorities seek to shore up a slowing economic recovery.
The latest monetary loosening comes as a post-pandemic recovery in the world’s second-largest economy shows signs of losing the initial momentum seen in the first quarter.
The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20%.
While all 32 participants in a Reuters poll had expected reductions to both rates, the cut to the five-year rate was smaller than many expected.
“These cuts will lower the cost of new loans, as well as interest payments on existing loans,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
“That should offer some modest support to economic activity. But we think it is unlikely to drive a sharp acceleration in credit growth, given weak credit demand.”
The smaller-than-expected cut disappointed investors with the Hang Seng Mainland Properties Index dropping 3.61%, outpacing a fall in the benchmark Hang Seng Index. The Chinese currency lost 0.25% and broader Asian stock markets also dipped.
The People’s Bank of China (PBOC) lowered short- and medium-term policy rates last week.
The medium-term lending facility (MLF) rate serves as a guide to the LPR and markets mostly see the medium-term rate as a precursor to any changes to longer-term lending benchmarks.
Xing Zhaopeng, senior China strategist at ANZ, said the smaller-than-expected cut to five-year tenor suggests authorities are wary of using the property market as a form of short-term stimulus, which could create new bubble risks.
“It shows that the policy still gives priority to the new economy, and it will only ensure a soft landing of the old economy rather than re-stimulation,” Xing said.
Xing added that new stimulus could combine short-term measures and long-term reforms, with more details and measures to be announced in the coming weeks.
China’s cabinet met on Friday to discuss measures to spur economic growth and pledged more policy support.
“More policy measures may be rolled out separately, including but not limited to a 25 basis point cumulative cut to the LPR by the year-end, and property-easing measures to cut payment ratios or mortgage rates, as well as some form of consumption support,” analysts at BofA global research said in a note.
“Such marginal easing will probably help prevent growth from slowing sharply, but will unlikely offer a strong boost to reverse the growth slippage in the near future,” they said, downgrading their forecasts for China’s economic growth outlook for this year to 5.7% from 6.3% previously.
Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the recovery was faltering.
“There is still a possibility of further interest rate cuts and reserve requirement ratio (RRR) cuts in the remainder of this year,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle.
“There is no need to roll out all policy measures all at once.”
The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks that submit proposed rates to the central bank every month.
China has released a slew of weak economic indicators in recent weeks, leading to increased calls for stimulus measures. Youth unemployment rose to a record 20.8 per cent in May, while exports sank for the first time since February, official data shows.
This month, top economist and government adviser Liu Yuanchun called for regulators to cut borrowing costs further to ease the financing burden on small and medium-sized private businesses.
Reports have in recent days said Beijing is lining up a series of measures targeting multiple areas of the economy, particularly the real estate sector, which makes up a huge portion of the gross domestic product.
China’s six largest state-owned commercial banks cut interest rates for savers this month to boost spending, according to announcements on their websites, after a request by the central bank.
But cutting interest rates alone is “unlikely to trigger a jump in household or corporate borrowing and spending”, analysts from Capital Economics wrote in a note on Friday. “In the short-run, the most effective way for officials to boost demand is to direct state entities to spend more,” the analysts wrote.
At the same time, “with no ‘easy fix’ on the horizon, the property market’s weakness and its negative impact on the rest of the economy will likely persist”, said Stephen Innes, managing partner at SPI Asset Management, in a note on Tuesday.
China’s debt-laden property sector — a key driver of the country’s economy — is struggling to climb out of a record-breaking slump after authorities narrowed the industry’s access to credit in 2020.
To revive a struggling sector, the government has adopted a more conciliatory approach since November, with targeted support measures for the most financially sound developers — with mixed results.
With inputs from agencies
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