One week after lowering two interest rates in an unexpected move, China reduced its key lending rates once more on Monday.
The actions are considered as an effort to boost credit demand and jump-start an economy that has been harmed by prolonged Covid lockdowns and issues with property debt.
The prime rate for five-year loans was decreased by 15 basis points to 4.30% from 4.45%, and the prime rate for one-year loans was decreased by 5 basis points to 3.65% by the People’s Bank of China.
In China, the majority of new loans are based on the one-year LPR.
The interest rate on some financial institutions’ loans under the Chinese central bank’s medium-term lending facility (MLF) for one year was reduced by 10 basis points last week. The seven-day reverse repo rate was also decreased by 10 basis points to 2%.
Positive responses to the rate increases from last week were transient, according to analysts like Navigate Commodities managing director Atilla Widnell.
“Fresh monetary easing/stimulus was seen as futile as ‘flogging a dead horse,’ given that China’s economy desperately needs consumers back on the streets spending money,” in a note, he stated.
According to David Chao, global market strategist for Asia Pacific (ex-Japan) at Invesco, the most recent round of cuts pointed at the severity of the decline in the real estate industry.
He acknowledged that these cuts won’t be sufficient to boost liquidity, though.
“It sends a strong message that policymakers are willing to take more forceful actions to stabilize the ailing market,” he mentioned it in a note.
“Though the LPR cut may provide near-term relief, easing liquidity alone is unlikely to lead to a turnaround to the property market.”
“Due to the lack of confidence in large developers and the presales model,” he continued, lower mortgage rates haven’t yet resulted in more real estate transactions.
Since “central and local governments have the financial tools to provide an excess of 3 trillion yuan to boost the property sector,” Chao said he does not anticipate that these will be the final changes to China’s monetary policy.
Although today’s rate reduction won’t change much, they are still a positive development, according to fund manager Joshua Crabb, head of Asia Pacific equities at Robeco.
He claimed that opening up through modifications to its Covid-19 rules would be a more advantageous course of action because that would be the necessary economic mending.
“For now, it’s a positive sign in the right direction … but I think people are looking for something bigger in order to get a bit more excited about the market,” Crabb told on Monday.
China’s recession has been unavoidable, according to Clifford Bennett, chief economist at ACY Securities, even though the rate reductions will have “zero influence” on the economy’s and the housing market’s current course.
The coincidence between the outbreak and China’s economic recovery, he continued.
Several experts revised downward their growth predictions for China last week. Nomura cut its full-year growth predictions to 2.8% from 3.3%, while Goldman Sachs lowered its expectation for the entire year of 2022 to 3.0% from 3.3% growth.
“If you will, Covid-19 has masked a far more fundamental and permanent shift in the nature of the China economy. From boom growth period, agrarian, to consumer society,” Bennett said.
“As impressive as all that be, the rapid and far easier growth pace of the past is at an end.”
Bennet argued that even with GDP growth of 2%, China will continue to be a major economic force as the economies of the US and Europe slowed.