China: In response to a number of issues affecting its slowing economy, China on Monday cut two of its key benchmark lending rates. The large cut in the mortgage reference gauge indicated particular concern for the country's housing market.

The People's Bank of China (PBOC) confirmed that the one-year loan prime rate (LPR), on which most new and outstanding loans are based, was reduced to 3.65 per cent from 3.7 per cent in the August fixing.

The five-year LPR, which serves as a benchmark for mortgage rates, was also reduced from 4.45 to 4.3%.

The one-year loan prime rate was reduced by five basis points by Chinese banks, but the five-year rate was reduced by fifteen basis points. According to Iris Pang, chief economist at ING Bank of Greater China, this suggests that banks are helping mortgage borrowers.

It was unexpected that banks this month reduced the prime rate on one-year loans by five basis points only. It is possible that banks may have decided to reduce the prime rate on five-year loans by 15 basis points instead of reducing rates on long-term loans.

Most home loans are based on the prime rate for a five-year loan. Thus, it is clear that this rate reduction will lighten the burden on the borrowers.

Monday's action comes after a sudden drop in the one-year medium-term loan facility (MLF) rate to 2.75 per cent from 2.85 per cent early last week.

Since 2019, the LPR has been considered China's de facto benchmark funding rate. A group of 18 banks fix the rate, which is said to be a spread over the central bank's MLF interest rate.

The central bank uses MLF loans as a key tool to inject medium-term liquidity into the interbank market.
Over the past two years, China's real estate market has declined sharply, mainly as a result of regulatory restrictions on lending and the effects of the coronavirus.

Threats to the real estate market and the stability of the financial system remain despite assurances from Beijing, and a wave of boycotts of mortgage payments has broken out recently in several provinces offering little relief to unfinished home buyers.

“The cuts will result in lower interest payments on existing loans, relieving pressure on obligated businesses. Additionally, it will reduce new loan costs. According to Sheena Yu, China economist at Capital Economics, “very large cuts in five-year The rate shows that the PBOC is particularly concerned about problems in the housing market.

However, this change will not be effective for homebuyers with existing mortgages until early next year. Additionally, the current weakness in credit demand is partly structural and reflects the unpredictability brought on by China's ongoing zero-Covid strategy, along with declining consumer confidence in the housing market. These are constraints that monetary policy has been unable to effectively address.

At its quarterly economic analysis conference in late July, China's top leadership stressed the need to strike a balance between development, coronavirus containment and development security.

However, despite promising to achieve the best economic results for the year, they failed to mention the annual growth target of "around 5.5 per cent".

The world's second-largest economy is projected to fall short of the annual target after registering only 2.5% growth in the first half of this year.

Recent forecasts for economic growth for 2022 from Standard Chartered, Goldman Sachs, Nomura and Natixis range from 3.5 to 2.8 percent.

The Washington-based International Monetary Fund has forecast China's economy to grow at 3.3%, down from its previous forecast of 4.4%, widely considered the industry standard.

“Overall, the recent announcements from the PBOC give us the impression that policy is being eased, but not significantly. expect two additional 10-basis-point reductions.

In order to encourage banks to reduce lending rates, additional strategies are also likely to be employed by the bank. Although additional easing measures are planned, credit growth is responding less rapidly than previously in policy. Furthermore, despite the slowdown in credit growth, PBOCs still hesitate to adopt significant incentives. As a result, we believe that any additional support will not be enough to ignite a strong recovery.

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