The People’s Bank of China has cut one of the country’s most important lending rates in a sign that the government is pushing ahead with policy easing measures to counter a loss of economic momentum.
The central bank cut the one-year loan prime rate, which is widely used as a benchmark for the loans banks make to their customers, from 3.85 per cent to 3.8 per cent. Monday’s rate cut was the first since April 2020, when the country was grappling with the initial outbreak of coronavirus.
China’s economy, which last year bounced back from the fallout of the coronavirus pandemic far quicker than other big economies, has recently come under pressure from a property slowdown, energy shortages and lingering weakness in consumer activity.
In the third quarter, gross domestic product grew 4.9 per cent year-on-year, its slowest pace in a year. Challenges across the country’s real estate industry have intensified since then, with new home prices falling for several consecutive months and heavily-indebted developer Evergrande defaulting along with several of its peers.
The People’s Bank of China this month cut the reserve requirement ratio, a rate for banks, in effect pumping close to $200bn into the financial system. Last week, however, it kept the medium-term lending rate — the rate at which the central bank lends to banks — at 2.95 per cent.
Economists and analysts said that China had entered an easing cycle, and pointed to the prospect of more cuts in the first half of next year.
Ken Cheung, chief Asian FX strategist at Mizuho, said the LPR cut “indicated the increasing downward pressures for China’s economy and PBoC’s intention to support growth”.
Economists at Société Générale said the “seemingly small reduction [to the one-year LPR] reflected an increasingly dovish policy stance”. It added: “Each step so far seems marginal and constrained, which only means that more will be needed.”
Fears of asset bubbles spurred Beijing to introduce measures last year designed to constrain leverage at its biggest developers, and early this year brought in limits on mortgage lending from banks as a portion of their balance sheets.
Despite the slowdown and its responses, the government has shown commitment to its deleveraging initiative. The five-year loan prime rate, which is used to price mortgages, was on Monday kept unchanged by the PBoC at 4.65 per cent.
Economic data for November published last week highlighted a fall in property investment. Retail sales rose just 3.9 per cent compared with a year earlier, below expectations, while industrial production added 3.8 per cent.
Source: Economy - ft.com
