LPR cut: China disappoints investors with ‘disappointing’ decision on key interest rate

Hong Kong

China surprised investors by deciding not to cut a key interest rate affecting mortgages, in a move economists say will make it difficult to revive confidence in the country’s troubled real estate sector that has soured prospects for the world’s second-largest economy.

The People’s Bank of China (PBOC) has maintained the five-year loan prime rate (LPR), which is 4.2%, I’m waiting On Monday, with the one-year loan base rate cut by 10 basis points from 3.55% to 3.45%.

A cut to the one-year rate was widely expected, but the inaction on the five-year rate was not. Almost all analysts polled by Reuters predicted that the five-year rate, which is used as a mortgage benchmark, would fall by at least 15 basis points.

The result was “disappointing,” Capital Economics’ Julian Evans-Pritchard and Zichun Huang wrote in a research note on Monday.

“On its own,” the Chinese economists wrote, “the latest round of cuts is too small to have much impact.” “[This] Reinforces our view that the PBOC is unlikely to adopt the larger interest rate cuts that would be required to revive credit demand.”

The LPR sets the interest that commercial banks charge their best customers and serves as a standard for home and corporate lending. The one-year rate affects most new and existing loans, while the five-year rate affects the pricing of long-term loans, such as mortgages.

Lowering the rate would reduce the cost of borrowing for those who borrow or repay the interest.

Shares in Hong Kong and mainland China, as well as the Chinese currency, fell on the news. Hang Seng in Hong Kong

It traded down 1.5%, dipping deeper into a bear market, while the Shanghai Composite Index traded

decreased by 0.5%.

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The Chinese yuan has lost nearly 6% against the dollar so far this year, as concerns grow about the future of the Chinese economy, which last week reported lackluster economic data for another month.

Besides the crisis in the real estate sector, China is grappling with deflation, weak exports and record youth unemployment.

Economists had been expecting cuts in the loan’s base interest rate after China made a surprise cut to another rate, the Medium-Term Lending Facility (MLF), last week. It cut that by 15 basis points, to 2.5%, on Tuesday.

The underlying loan rate is tied to the Multilateral Fund, so Monday’s new cuts were “largely a given,” according to Capital Economics.

Goldman Sachs analysts said in a research note that even if the People’s Bank of China lives up to expectations by cutting interest rates as much as expected, it would be “far from enough to boost growth.”

The central bank said on Sunday that it held a meeting late last week with state-owned commercial banks, government agencies and other institutions to discuss needed policy support.

During the meeting, China’s economic recovery was described as coming in waves and part of a “zigzag” process, the ministry said in a press release. Joint statement With financial and securities regulators.

“Major financial institutions should take the initiative to operate and increase loans, and large state-owned banks should continue to play a supporting role,” they said.

“We must pay attention to maintaining a stable pace of loan growth, properly guiding credit fluctuations, and strengthening the stability of financial support for the real economy.”

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Monday’s announcement adds to concerns about the state of the Chinese economy.

On Monday, UBS lowered its economic forecasts for the country, saying it now expects growth of 4.8% for 2023 and 4.2% for 2024. That compares with previous forecasts of 5.2% and 5%, respectively.

Chinese economist Tao Wang said in a research report that the downgrade came “in light of a deeper and longer decline in real estate and weaker global demand.”

“Chinese economic growth has slowed since April as the real estate downturn has deepened. Support for government policy has arguably been lower than indicated earlier in the year, and lower than we expected.”

China tried to drum up support with the People’s Bank of China Cut both LPR rates In June for the first time since August 2022. That was when the economy took a hit due to renewed Covid lockdowns and a slowdown in real estate.

But after making a solid start at the start of the year, the economic picture has darkened. A slowdown was recorded in various parts of the economy in July and the pressure in the broad real estate market worsened.

Last week, official data showed that consumer spending, factory production and fixed-asset investment slowed further in July than last year. Meanwhile, that month, Chinese exports suffered their biggest drop in more than three years.

Goldman Sachs analysts noted in a research report on Saturday that Chinese markets were also under downward pressure last week due to “growing concerns about the housing market and the contagion of that financial economy.”

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Investors were worried about the multi-billion dollar debt burden of one of China’s largest real estate developers, Country Garden. Recently, the company has defaulted on some payments and has suspended internal bond trading, which has contributed to fears of default.

Last week, Evergrande, another troubled Chinese developer, filed for bankruptcy in the US, adding to concerns about a broader crisis. This means that it will be more difficult for policymakers to shape a shift.

“A revival of demand will require much larger rate cuts, or regulatory measures to effectively restore confidence in the housing market,” Capital Economics said Monday.

“The big picture is that the PBOC’s approach to monetary policy is of limited use in the current environment and will not be sufficient, at least on its own, to cap growth.”

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