China lowers lending standards to revive sagging economy

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

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SHANGHAI, Aug 22 (Reuters) – China cut its key rate and mortgage benchmark by a larger margin on Monday, adding to last week’s easing measures, as Beijing steps up efforts to revive a economy hampered by a real estate crisis and a resurgence of covid cases.

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

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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. Read more

“The asymmetric LPR cuts are in line with our expectations,” said Marco Sun, chief financial markets analyst at MUFG Bank.

“The policy intent was quite obvious…as the 15 basis point cut to the 5-year LPR was intended to stimulate demand for long-term funding.”

Monday’s 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.

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. Read more

FRAGILE DATA CHALLENGES THE PBOC

The drop in the LPR came after the People’s Bank of China (PBOC) surprised the market by lowering the MLF rate and another short-term liquidity tool last week, as authorities sought to boost credit demand in a sluggish economy. Read more

A series of data, also released last week, showed the economy unexpectedly slowed in July and prompted some global investment banks, including Goldman Sachs and Nomura, to revise their revenue growth forecasts downward. gross domestic (GDP) for China.

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 LPR cut was necessary, “but the magnitude of the cut was not enough to drive demand for funding,” said Xing Zhaopeng, senior China strategist at ANZ.

Xing expects the one-year LPR could be further reduced.

The PBOC is walking a tightrope in its efforts to revive the economy. 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. Read more

China’s economy, the world’s second largest, narrowly avoided contracting in the second quarter as widespread 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.

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Reporting by Winni Zhou and Brenda Goh; Editing by Shri Navaratnam

Our standards: The Thomson Reuters Trust Principles.

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