China cuts lending benchmarks to revive stuttering economy

Moves come after economy unexpectedly slowed in July and global investment banks cut growth forecasts.

Yuan bills
China has cut its benchmark lending rate in the latest effort to revive its flagging economy [File: Florence Lo/Reuters]

China has cut its benchmark lending rate and lowered the mortgage reference by a bigger margin, 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-19 cases.

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

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.

In a Reuters news agency 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 percent of them forecasting a reduction larger than 10 basis points.

“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 [basis points] 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 gross domestic product (GDP).

The LPR cut came after the People’s Bank of China surprised the market by lowering the medium-term lending facility 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 GDP growth forecasts for China.

Source: Reuters