(Oct 21): China cut its benchmark lending rates after the central bank lowered interest rates at the end of September as part of a series of measures aimed at reviving economic growth and halting a housing market crash.
The one-year loan prime rate (LPR) was lowered to 3.10% from 3.35%, while the five-year LPR was reduced to 3.60% from 3.85%.
The size of the cut is at the upper bound of the range of 20 to 25 basis points (bps) forecast by People’s Bank of China (PBOC) governor Pan Gongsheng in speeches since late September, and bigger than the 20 bps reduction projected by all 17 economists surveyed by Bloomberg.
The cuts in the LPR — which is set by a group of big Chinese banks — come after the PBOC outlined steps last month to encourage households and companies to borrow money. The measures include lowering interest rates and unlocking liquidity to encourage bank lending.
“The larger cuts confirm the PBOC’s stance of easing monetary policy more quickly, and echo the Politburo’s statement of cutting rates more forcefully,” said Beckly Liu, the head of China macro strategy at Standard Chartered plc.
The offshore yuan was nearly flat at around 7.12 per dollar. Thirty-year government bond yield was little changed at 2.3%, amid thin trading on Monday morning.
China’s top leaders in a September Politburo meeting called for substantial cuts in the interest rates and measures to stop the property market from declining further, their strongest vow yet to stabilise the crucial industry.
The larger-than-expected LPR cuts are meant to contribute to the stabilisation of the property market, according to Bruce Pang, the chief economist for Greater China at Jones Lang LaSalle Inc.
More easing
The PBOC has signalled that more easing is on the cards. Pan reiterated last Friday that the central bank may lower the reserve requirement ratio (RRR) — which frees up cash for banks to lend — by another 25 to 50 bps by year end based on the liquidity situation.
As for interest rates, many expect the PBOC to only reduce them again next year after the recent outsized cuts.
However, if there are “major negative shocks to growth and financial markets, then the PBOC could be more aggressive in its easing to counter such shocks”, Xiaojia Zhi, the head of research at Credit Agricole CIB.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages and other long-term loans.
China’s largest state-owned lenders cut their deposit rates last week, a step to offset the effects of lower loan rates on their narrowing profit margins.
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