China has implemented a series of key lending benchmark reductions for the first time in 10 months, signalling its efforts to support a slowing economic recovery.
However, due to concerns surrounding the property market, the easing measures were not as significant as initially anticipated.
The decision to adjust the monetary policy comes at a time when China’s post-pandemic rebound, observed during the first quarter, is showing signs of losing momentum.
With the intention of boosting economic activity, the one-year loan prime rate (LPR) underwent a reduction of 10 basis points, reaching 3.55%. Similarly, the five-year LPR experienced an equal decrease, ultimately settling at 4.20%.
Despite expectations for reductions in both rates among the 32 participants in a poll, the smaller-than-expected cut to the five-year rate disappointed investors. This led to a decline of 3.61% in the Hang Seng Mainland Properties Index, surpassing the fall in the benchmark Hang Seng Index. Additionally, the Chinese currency experienced a depreciation of up to 0.25%, and broader Asian stock markets followed suit with a dip in their performance.
Julian Evans-Pritchard, the head of China economics at Capital Economics, believes that these rate cuts will reduce the cost of new loans and interest payments on existing loans, thereby providing some modest support to economic activity.
However, he also noted that weak credit demand is unlikely to drive a substantial acceleration in credit growth.
The smaller reduction in the five-year rate reflects authorities’ concerns about using the property market as a short-term stimulus, as it could potentially create new risks related to market bubbles.
Xing Zhaopeng, senior China strategist at ANZ, suggested that policymakers are prioritizing the new economy while aiming to ensure a soft landing for the old economy, rather than pursuing immediate re-stimulation.
He added that upcoming stimulus measures could involve a combination of short-term initiatives and long-term reforms, with further details to be announced in the coming weeks.
China’s cabinet recently convened to discuss measures aimed at stimulating economic growth, reaffirming its commitment to providing additional policy support.
Analysts at BofA Global Research anticipate that separate policy measures may be introduced, including a cumulative 25 basis point cut to the LPR by the end of the year.
Property-easing measures, such as reductions in payment ratios or mortgage rates, as well as some form of consumption support, are also expected.
However, they caution that these marginal easing measures are unlikely to reverse the growth slowdown significantly, resulting in a revision of their economic growth outlook for China in 2023 from 6.3% to 5.7%.
In response to May’s faltering recovery data, several global investment banks have adjusted their 2023 gross domestic product (GDP) growth forecasts for China, indicating concerns about the current economic trajectory.
Bruce Pang, Chief Economist and Head of Research for Greater China at Jones Lang LaSalle, suggests that further interest rate cuts and reductions in the reserve requirement ratio (RRR) may be implemented later in the year. Pang emphasizes the importance of gradually rolling out policy measures instead of introducing them all at once.
The loan prime rate (LPR) is determined by 18 designated commercial banks, which propose rates to the central bank on a monthly basis.
The one-year LPR serves as the basis for the majority of new and existing loans in China, while the five-year rate influences mortgage pricing. The last time China reduced both LPRs was in August 2022 to stimulate economic growth.
In conclusion, China’s recent adjustments to key lending benchmarks reflect its proactive stance in supporting the slowing economic recovery.
While the easing measures were not as substantial as anticipated due to concerns about the property market, they are expected to provide some support to economic activity.
As policymakers continue to navigate the delicate balance between stimulating growth and managing potential risks, further measures may be introduced in the future. It remains crucial for China to carefully calibrate its policies to ensure a sustainable and stable economic trajectory in the coming months.
