China ramps up easing measures, lowers lending standards to revive faltering economy

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

SHANGHAI (Reuters) – China cut its benchmark lending rate and cut its mortgage reference by a larger margin on Monday, adding to last week’s easing measures, as Beijing ramps up efforts to revive an economy stymied by a property crisis and a resurgence in real estate activity. Corona virus cases.

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

However, weak demand for credit is forcing the People’s Bank of China (PBOC) to try to keep the Chinese economy in a state of balance.

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

LPR was reduced for another year in January. The five-year period, which was lowered last May, is affecting mortgage rates.

“Finally, the impression we get from all the recent PBoC announcements is that policy is being relaxed but not significantly,” said Shena Yu, China economist at Capital Economics.

“We expect to make two additional 10 basis points reductions in the PBoC policy rates during the remainder of this year and continue to anticipate a reduction in the reserve ratio in the next quarter.”

The LPR cuts come after the People’s Bank of China (PBOC) surprised markets last week with a cut in the rate of the Medium Term Lending Facility (MLF) and another tool for short-term liquidity, as a string of recent data showed the economy losing momentum amid slowing global growth and rising borrowing costs. in many developed countries. Read more

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

But concerns about widening policy divergence with other major economies pushed the Chinese yuan to its lowest levels in nearly two years. The local yuan was last traded at 6.8258 to the dollar.

In a Reuters poll last week, 25 out of 30 respondents expected a 10 basis point reduction to the one-year LPR. All survey respondents also expected a five-year reduction, including 90% who expected a decline of greater than 10 basis points. Read more

Test time for PBOC

China’s economy, the world’s second-largest, narrowly avoided contraction in the second quarter as widespread COVID-19 lockdowns and a property crisis took a heavy toll 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 persistent hurdles in the supply chain are undermining the chances of a strong recovery in China.

A batch 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 full-year GDP growth forecasts for China.

Goldman Sachs cut China’s full-year 2022 GDP growth forecast to 3.0% from 3.3% previously, well below Beijing’s target of around 5.5%. In a tacit acknowledgment of the challenge in achieving the GDP target, the government omitted its mention at a recent high-level political meeting.

A deeper cut in the mortgage reference rate underscores the efforts of policy makers to stabilize the real estate sector after a series of defaults among developers and slumping home sales hurt consumer demand.

The weakness in loan demand is partly structural, said Yue of Capital Economics, “reflecting the loss of confidence in the housing market and uncertainty caused by recurring disruptions from the COVID-free China strategy.”

“These are obstacles that cannot be easily resolved by monetary policy.”

Sources told Reuters last week that China would ensure new domestic bond issuance by a select few private developers to support a sector that accounts for a quarter of national GDP. Read more

Sheng Chuping, chief China strategist at ANZ, said a reduction in the LPR was necessary, “but the size of the reduction was not enough to stimulate demand for funding,” and he expects the LPR to be reduced for one more year.

Goldman Sachs economists also expected more easing, but noted that policy makers face a test time.

Economists said the People’s Bank of China may not be “in a hurry to make further rate cuts” due to “rising food prices and the potential spillover effects from monetary tightening in developed markets”.

(Reporting by Winnie Zhou and Brenda Goh) Editing by Shree Navaratnam

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