China cuts interest rates in a surprise bid to boost its economy

China on Friday cut its benchmark mortgage rate by a sharper than expected, the second cut this year, as Beijing seeks to revitalize the ailing housing sector to prop up the economy. Top officials have pledged more action to combat a slowdown in the world’s second-biggest economy, which has been hit by COVID-19 outbreaks that have imposed tough measures and restrictions on mobility, causing huge disruptions to activities. Many market participants believe Friday’s move was also in response to Chinese Premier Li Keqiang’s call for a decisive acceleration of policy adjustments and a quick return to normal for the economy. “Today’s cut to the five-year loan prime rate should help revive home sales, which have been deteriorating lately,” Capital Economics’ Julian Evans-Pritchard said in a statement. “But the lack of a reduction in the one-year LPR suggests that the PBOC is looking to continue easing in a targeted manner and that we shouldn’t expect large-scale stimulus of the kind we’ve seen in 2020.” China lowered in a monthly Fixed the five-year lending rate (LPR) by 15 basis points to 4.45%, the biggest cut since China overhauled the interest rate mechanism in 2019 and more than the 5 or 10 basis points predicted by most in a Reuters poll . The one-year LPR was unchanged at 3.70%. The country’s benchmark stock index, the Shanghai Composite Index, rose about 1% in early trade on Friday’s rate cut. The move failed to excite mainland-listed property stocks, which were flat, although Hong Kong-listed developers edged up slightly. Many private-sector economists expect China’s economy to contract year-on-year this quarter, compared with first-quarter growth of 4.8%. Indicators from lending, industrial production and retail sales showed that COVID-related strict measures and mobility restrictions were taking a heavy toll. A key drag on growth has been the real estate sector, which policymakers are trying to reverse. Real estate and related industries like construction make up more than a quarter of the economy. China’s home sales fell at their fastest pace in around 16 years in April, while new home prices fell month-on-month for the first time since December, hurt by weak demand amid sweeping COVID-19 lockdowns. “Policymakers may have reached a consensus on whether to revive the real estate sector,” said Xing Zhaopeng, senior China strategist at ANZ, forecasting further easing measures. LIMITED SPACE FOR CUTTING The central bank has pledged to step up support for the slowing economy, but analysts say the scope for policy easing could be limited by concerns about capital outflows as the Federal Reserve hikes interest rates. Capital Economics believes the lack of a year-long LPR cut suggests the central bank may be concerned about the potential impact on capital outflows and the yuan. The LPR is a credit reference rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year interest rate. Both interest rates were cut in January to support the economy. Friday’s cut suggests that “China’s economic growth has faced mounting resistance this year,” said Marco Sun, chief financial markets analyst at MUFG Bank. Eighteen out of 28 traders and analysts in a Reuters poll had forecast cuts in both interest rates, including 12 who expected a 5 basis point cut for each tenor. A campaign by authorities to reduce high levels of debt last year turned into a liquidity crunch for some major developers, causing bond defaults and shelved projects, shaking global financial markets. Since late last year, Beijing has taken steps to revitalize the real estate sector. These include making it easier for large and state developers to raise capital, relaxing rules on escrow accounts for pre-sale funds, and allowing some local governments to lower mortgage rates and down payment ratios. This week, tax authorities lowered mortgage rates for some homebuyers. But that measure and Friday’s cut alone won’t ease funding stress for developers, many of whom are struggling to refinance their debt. Property stocks have rallied lately, but the muted reaction to Friday’s cut suggests some investors believe it may not be enough to revitalize the ailing sector.

Reuters)