On Monday, China decreased its benchmark lending rate and lowered the mortgage reference by a larger margin. These actions are in addition to the easing measures that were taken the previous week. Beijing is increasing its efforts to revive an economy that has been hampered by a property crisis and a resurgence in COVID cases.
In its attempts to jumpstart the economy, the People's Bank of China (PBOC) is balancing precariously on a tightrope.
When the Federal Reserve and other economies begin to aggressively raise interest rates, providing an excessive amount of stimulus could add to inflationary pressures and put the economy at risk of capital flight.
However, low demand for lending is compelling the People's Bank of China (PBOC) to take action in order to maintain economic stability in China.
During the central bank's monthly fixing, the loan prime rate (LPR) for one year was reduced by 5 basis points, bringing it down to 3.65%, and the LPR for five years was reduced by 15 basis points, bringing it down to 4.30%.
The LPR for the first year was cut for the last time in January. The cost of home mortgages is significantly impacted by the five-year tenor, which had its most recent reduction in May.
"The overall impression we get from all the PBOC's recent announcements is that policy is being eased but not drastically," said Sheana Yue, China economist at Capital Economics. "All in all," she said, "we get the idea that policy is being eased but not dramatically."
"We continue to estimate a reserve requirement ratio (RRR) cut for the next quarter as well as two additional 10-bps cuts to the PBOC policy rates during the balance of this year,"
As a string of recent data showed that the economy was losing momentum in the face of slowing global growth and rising borrowing costs, the People's Bank of China (PBOC) surprised the markets last week by lowering the medium term lending facility (MLF) rate and another short-term liquidity tool. The LPR cut comes after the PBOC surprised the markets by lowering the MLF rate.
In a survey that was carried out by Reuters the week before last, 25 out of 30 respondents forecasted that the one-year LPR would decrease by 10 basis points.
Everyone who participated in the survey anticipated a reduction to the five-year tenor, with ninety percent of them predicting a reduction greater than 10 basis points (bps).
The Chinese yuan fell to levels that have not been seen in nearly two years due to concerns of a widening policy divergence with other major economies. The last price that the onshore yuan traded at against the dollar was 6.8232.
LOSS OF MOMENTUM
As widespread lockdowns and a property crisis took a heavy toll on consumer and corporate confidence, China's economy, the world's second largest, narrowly avoided shrinking in the second quarter.
Consumption continues to be hampered by Beijing's stringent "zero-COVID" campaign, and the number of reported cases has increased once more in recent weeks.
The likelihood of China seeing a robust comeback is being hampered by a number of factors, including a moderation in the rate of economic expansion around the world as well as ongoing bottlenecks in the supply chain.
A plethora of data that was made public last week showed that the economy unexpectedly slowed down in July. This prompted a number of global investment firms, including Goldman Sachs and Nomura, to adjust down their predictions for the full-year GDP growth of China.
The full-year GDP growth prediction for China was reduced by Goldman Sachs to 3.0% in 2022, down from 3.3% in the prior forecast. This is significantly lower than Beijing's aim of approximately 5.5%. In a recent high-profile policy discussion, the government chose not to mention the difficulty of meeting the GDP target. This omission can be interpreted as a tacit acknowledgment of the difficulty of meeting the target.
According to Marco Sun, the senior financial market analyst at MUFG Bank, "The asymmetrical LPR cuts came in line with our predictions." [Citation needed]
The deeper cut to the mortgage reference rate underscores efforts by policymakers to stabilize the sector after a string of defaults among developers and a slump in home sales hammered consumer demand. "The policy intention was quite obvious... as the 15 bps cut to the 5-year LPR was meant to boost long-term financing demand."
Reuters reported last week that sources have indicated that China will guarantee fresh onshore bond issuance by a select group of private developers in order to bolster the industry, which accounts for one quarter of the national GDP.
It was important to lower the LPR, but "the scale of the reduction was not enough to promote financing demand," said Xing Zhaopeng, senior China strategist at ANZ. "The reduction did not go far enough."
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