China lowers lending standards to revive faltering economy

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

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SHANGHAI, Aug 22 (Reuters) – China cut its key rate and mortgage benchmark by a larger margin on Monday, adding to last week’s easing measures, as Beijing steps up efforts to revive a economy hampered by a real estate crisis and a resurgence of covid cases.

The 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 the flight of risk capital as the Federal Reserve and other economies aggressively raise interest rates. Read more

However, weak credit demand is forcing the hand of the PBOC as it tries to keep the Chinese economy in balance.

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

The one-year LPR was last reduced in January. The five-year term, which was last lowered in May, influences the price of mortgages.

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

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

The LPR cuts come after the PBOC surprised markets last week by lowering the Medium-Term Lending Facility (MLF) rate and another short-term liquidity tool, as a series of recent data showed that the economy was losing momentum amid slowing global growth and rising borrowing costs. . Read more

Shares of Chinese developers listed in Hong Kong (.HSMPI) rose 1.7%, while China-listed real estate stocks (.CSI000952) were relatively stable in the morning offers.

But concerns over widening policy divergence with other major economies have driven the Chinese yuan to near two-year lows. The onshore yuan last traded at 6.8232 to the dollar.

In a Reuters poll conducted last week, 25 out of 30 respondents predicted a 10 basis point reduction in the LPR year on year. All of those surveyed also predicted a five-year term reduction, with 90% predicting a reduction of more than 10 basis points. Read more

TEST TIME FOR PBOC

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

Beijing’s strict “zero-COVID” strategy remains a drag on consumption, and in recent weeks cases have rebounded again. Adding to the gloom, a slowdown in global growth and ongoing supply chain issues are hampering the chances of a strong recovery in China.

A slew of data, 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 GDP growth forecasts for China over the whole year.

Goldman Sachs lowered China’s GDP growth forecast for 2022 to 3.0% from 3.3% previously, well below Beijing’s target of around 5.5%. In tacit recognition of the challenge of meeting the GDP target, the government failed to mention it at a recent high-level political meeting.

The larger drop in the benchmark mortgage rate underscores efforts by policymakers to stabilize the real estate sector after a series of defaults among developers and a slump in home sales hammered consumer demand.

Sources told Reuters last week that China would underwrite new onshore bond issues by a few selected private developers to support the sector, which accounts for a quarter of the national GDP. Read more

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

Goldman Sachs economists also predicted more easing, but noted that policymakers faced a testing period.

The economist said the PBOC may not be ‘rushed to cut interest rates further’, due to ‘rising food prices and potential fallout from tighter monetary policy markets developed”.

(This story refiles to correct a typographical error in reference to Goldman Sachs in the penultimate paragraph)

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

Our standards: The Thomson Reuters Trust Principles.

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