China cuts lending benchmarks to revive faltering economy

SHANGHAI: China cut its benchmark lending rate and lowered the mortgage reference by a bigger margin on Monday, 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 People’s Bank of China (PBOC) is walking a tightrope in its efforts to revive growth. Offering too much of stimulus could add to inflation pressures and risk capital flight as the Federal Reserve and other economies raise interest rates aggressively.

However, weak credit demand is forcing the PBOC’s hand as it tries to keep China’s economy on an even keel.

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

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

“We anticipate two more 10 bps cuts to the PBOC policy rates over the remainder of this year and continue to forecast a reserve requirement ratio (RRR) cut 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 string of recent data showed the economy was losing momentum amid slowing global growth and rising borrowing costs in many developed countries.

Shares of Chinese developers listed in Hong Kong rose 1.7%, while China-listed property stocks were relatively stable in morning deals.

But worries over widening policy divergence with other major economies dragged the Chinese yuan, to near two-year lows. 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 to the one-year LPR. All of those in the poll also projected a cut to the five-year tenor, including 90% of them forecasting a reduction larger than 10 bps.

TESTING TIME FOR PBOC

China’s economy, the world’s second biggest, narrowly avoided contracting in the second quarter as widespread COVID 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 over recent weeks cases have rebounded again. Adding to the gloom, a slowdown in global growth and persistent supply-chain snags are undermining chances of a strong revival in China.