China steps up easing and cuts lending benchmarks to revive faltering economy

China cut its benchmark interest rate and mortgage reference by a wider range on Monday, adding to last week’s easing measures as Beijing ramps up efforts to revive an economy hampered by a housing crisis and a resurgence of COVID cases.

he People’s Bank of China (PBOC) is walking a tightrope in its efforts to revive growth. Offering too much stimulus could increase inflationary pressures and risk capital flight as the Federal Reserve and other economies aggressively raise interest rates.

However, weak credit demand is forcing the PBOC on hand as it tries to keep China’s economy on a steady course.

The one-year bank lending rate (LPR) was cut 5 basis points to 3.65 percent at Monday’s central bank monthly setting, while the five-year LPR was cut 15 basis points to 4.3 percent.

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

“All in all, from all the recent announcements by the PBOC, we get the impression that monetary policy is being eased, but not dramatically,” said Sheana Yue, China economist at Capital Economics.

“We expect two more 10 basis point cuts in PBOC interest rates later this year and continue to forecast a reserve requirement ratio (RRR) cut in the next quarter.”

The LPR cuts come after the PBOC surprised markets last week by slashing the interest rate on medium-term lending facilities (MLF) and another short-term liquidity tool, as a series of recent data showed the economy is recovering amid slowing global growth and rising borrowing costs lost momentum in many developed countries.

Shares of Hong Kong-listed Chinese developers rose 1.7 percent, while China-listed real estate stocks were relatively flat in the morning trade.

But concerns about widening policy divergence with other major economies pushed the Chinese yuan to near a two-year low. The onshore yuan last traded at 6.8258 per dollar.

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

China’s economy, the second-biggest in the world, narrowly avoided a contraction in the second quarter as widespread COVID-19 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.

A raft of data released last week showed that the economy slowed unexpectedly in July, prompting some global investment banks including Goldman Sachs and Nomura to downgrade their full-year GDP growth forecasts for China.

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

The 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 impacted consumer demand.

Yue of Capital Economics said the weakness in credit demand was partly structural, “reflecting a loss of confidence in the housing market and uncertainty caused by recurring disruptions from China’s zero-COVID strategy.”

“These are obstacles that are not so easy to solve in terms of monetary policy.”

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.

The LPR cut was necessary, “but the scale of the cut was not enough to spur funding demand,” said senior China strategist at ANZ Xing Zhaopeng, who expects the one-year LPR could be further cut.

Goldman Sachs economists also predicted further easing but noted that policymakers are facing a testing period.

The economists said the PBOC may not be “in a rush to impose more rate cuts” due to “rising food prices and potential spillovers from developed-market monetary tightening.” China steps up easing and cuts lending benchmarks to revive faltering economy

Fry Electronics Team

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