By Winni Zhou and Brenda Goh
SHANGHAI (Reuters) – China lowered its benchmark lending rate and lowered the mortgage benchmark by a larger margin on Monday, adding to last week’s easing measures, as Beijing steps up efforts to revive an economy hampered by a housing crisis and a resurgence in 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.
However, weak credit demand is forcing the hand of the PBOC as it tries to keep the Chinese economy in balance.
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. in many developed countries.
Shares of Hong Kong-listed Chinese developers rose 1.7%, while China-listed property stocks were relatively flat in morning trading.
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 6.8258 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.
TEST TIME FOR PBOC
China’s economy, the world’s second-largest, narrowly avoided contracting 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 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.
Capital Economics’ Yue said the weakness in loan demand is partly structural, “reflecting a loss of confidence in the housing market and uncertainty caused by recurring disruptions to China’s zero-COVID strategy.”
“These are brakes that cannot be easily solved by monetary policy.”
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.
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.
Economists said the PBOC may not be ‘rushed to cut interest rates further’, due to ‘rising food prices and potential fallout from tighter monetary policy in developed markets’ “.
(Reporting by Winni Zhou and Brenda Goh; Editing by Shri Navaratnam)