China cuts lending benchmarks to revive slowing demand

SHANGHAI/SINGAPORE (Reuters) – China cut its key credit benchmarks on Tuesday, the first such cuts in 10 months, as authorities seek to shore up a slowing economic recovery, although worries over the housing market meant easing did not turned out as big as expected.

The latest monetary easing comes at a time when the post-pandemic recovery in the world's second largest economy is showing signs of losing the initial momentum of the first quarter.

The benchmark one-year lending rate (LPR) was cut 10 basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20%.

While all 32 respondents to a Reuters poll had expected cuts at both rates, the cut in the five-year rate was smaller than many expected.

“These cuts will lower the cost of new loans as well as interest payments on existing loans,” said Julian Evans-Pritchard, head of China economics at Capital Economics.

“That should provide some support to economic activity. However, given weak credit demand, we think a sharp acceleration in credit growth is unlikely.”

The smaller-than-expected decline disappointed investors, with the Hang Seng Mainland Properties Index falling 3.61%, beating the decline in the benchmark Hang Seng Index. The Chinese currency lost as much as 0.25% and the broader Asian equity markets also fell.

The People's Bank of China (PBOC) cut its short- and medium-term interest rates last week.

The medium-term lending facility (MLF) rate serves as a guide for the LPR and markets tend to view the medium-term rate as a precursor to any changes in longer-term lending benchmarks.

Xing Zhaopeng, senior China strategist at ANZ, said the smaller-than-expected cut to the five-year maturity suggests authorities are reluctant to use the property market as a short-term stimulus, which could lead to fresh bubble risks.

“It shows that the policy still prioritizes the new economy and will only ensure a soft landing for the old economy, not a revival,” Xing said.

Xing added that new stimulus could combine short-term measures and long-term reforms, with more details and measures to be announced in the coming weeks.

China's cabinet met on Friday to discuss measures to boost economic growth and pledged more policy support.

“Other policy measures may be introduced separately, including but not limited to a cumulative 25 basis point cut in the LPR by the end of the year, and property easing measures to reduce payment ratios or mortgage rates, as well as some form of consumption support.” , analysts at BofA Global Research said in a note.

“Such minor easing is likely to help prevent a sharp slowdown in growth, but is unlikely to provide a strong impetus to reverse the growth slowdown in the near term,” they said, lowering their forecasts for China's economic growth outlook for this year from 6, 3 to 5.7% so far.

Several global investment banks lowered their 2023 gross domestic product growth forecasts for China after data in May showed the recovery was faltering.

“There is still the possibility of further rate cuts and reserve requirement ratio (RRR) cuts later this year,” said Bruce Pang, chief economist and research director for Greater China at Jones Lang LaSalle.

“There is no need to implement all policies at once.”

The LPR that banks normally charge their best customers is set by 18 nominated commercial banks, which submit proposed interest rates to the central bank each month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year interest rate influences mortgage pricing. China last lowered both LPRs in August 2022 to stimulate the economy.

(Reporting by Winni Zhou and Tom Westbrook; Graphics by Kripa Jayaram; Editing by Sam Holmes)

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