PC: Wall Street Journal
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.
Given that China’s economy urgently needs people to return to the streets and spend money, he wrote in a letter that “Fresh Monetary Easing/Stimulus was considered as fruitless as ‘flogging a dead horse’.”
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.
In a note, he stated that the step “sends a strong message that policymakers are willing to take additional severe actions to calm the ailing market.”
“Although the LPR cut may offer short-term respite, reducing liquidity by itself is unlikely to result in a recovery in the real estate market,” says the report.
He continued, “Due to the lack of faith in large developers and the presales model, decreased mortgage rates have not yet translated into larger real estate sales.”
When the “central and local governments have the financial means to give an excess of 3 trillion yuan to support the property industry,” according to Chao, he doesn’t anticipate these to be the last 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.
It’s a good indicator going in the correct direction for the time being. Crabb said on Monday on CNBC’s “Squawk Box Asia”: “I think people are hoping for something greater in order to become a little more enthusiastic about the market.
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 concealed a much more significant and long-lasting change in the structure of the Chinese economy. From the rural, boom-growth era to the consumer civilization,” Bennett stated.
“As remarkable as all that may be, the past’s pace of quick and significantly easier growth is coming to 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.