China cuts lending to revive faltering economy

FILE PHOTO: Workers work on an auto parts production line during a government-organized media tour of German engineering group Voith’s factory following the outbreak of the coronavirus disease (COVID-19) in Shanghai, China, on July 21, 2022. REUTERS/ Ali Song

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SHANGHAI, Aug 22 (Reuters) – China cut its key lending rate and cut its mortgage benchmark by a wide margin on Monday as Beijing boosts efforts to revive an economy reeling from an asset crisis and recovery. Covid patients.

The People’s Bank of China (PBOC) is walking a tightrope in efforts to revive growth. As the Federal Reserve and other economies aggressively raise interest rates, providing more stimulus will increase inflationary pressures and risk capital flight. read more

However, weak credit demand is forcing the PBOC’s hand as it tries to keep China’s economy on balance.

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The one-year lending prime rate (LPR) was cut by 5 basis points to 3.65%, while the five-year LPR was cut by 15 basis points to 4.30% in the central bank’s monthly fixing on Monday.

The one-year LPR was last cut in January. The five-year term, which was reduced last May, affects the cost of home mortgages.

“Overall, the impression we get from all the PBOC’s recent announcements is that policies are being eased, but not dramatically,” said Sheena Yu, China economist at Capital Economics.

“We expect two more 10 bps cuts in PBOC policy rates for the remainder of the year and forecast a reduction in the reserve requirement ratio (RRR) in the next quarter.”

The LPR cuts come after the PBOC surprised markets by cutting the medium-term lending facility (MLF) rate and another short-term liquidity tool last week, amid a string of recent data showing the economy losing momentum amid global growth and rising borrowing costs. . read more

Shares of Chinese developers listed in Hong Kong (.HSMPI) Listed property shares in China rose 1.7% (.CSI000952) Relatively stable in morning deals.

But worries about a widening policy divergence with other major economies dragged the Chinese yuan to a two-year low. The onshore yuan last traded at 6.8232 per dollar.

In a Reuters poll conducted last week, 25 of 30 respondents predicted a 10-basis-point cut to the one-year LPR. All those polled predicted a cut over the five-year period, with 90% predicting a cut of more than 10 bps. read more

Testing time for the PBOC

China’s economy, the world’s second largest, was briefly averted in the second quarter as widespread lockdowns and an asset crisis took a heavy toll on consumer and business confidence.

Beijing’s strict ‘zero-Covid’ strategy has been a drag on consumption, and cases have rebounded in recent weeks. Adding to the gloom, a slowdown in global growth and persistent supply chain disruptions undermine prospects for a strong recovery in China.

A batch of data released last week showed the economy unexpectedly slowed in July and prompted some global investment banks, including Goldman Sachs and Nomura, to revise their full-year GDP growth forecasts for China.

Goldman Sachs cut China’s 2022 full-year GDP growth forecast to 3.0% from 3.3%, well below Beijing’s target of 5.5%. In a tacit acknowledgment of the challenge of meeting the GDP target, the government avoided mentioning it at a recent high-level policy meeting.

The deep cut in the mortgage reference rate underscored policymakers’ efforts to stabilize the property sector after persistent defaults among developers and a slump in home sales hit consumer demand.

Sources told Reuters last week that China would guarantee new offshore bond issues by a select few private developers, which could support about a quarter of national gross domestic product. read more

The LPR cut is necessary, “but the scale of the cut is not enough to stimulate funding demand,” said Xing Zhaopeng, senior China strategist at ANZ, who expects the one-year LPR could be cut further.

Goldman Sachs economists forecast further easing, but noted that policymakers face testing times.

The economist said the PBOC would not be “in a rush to deliver more interest rate cuts” due to “rising food prices and the potential spillover effects of monetary policy tightening in developed markets”.

(This story has been revised to correct a typographical error referencing Goldman Sachs in the final paragraph)

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Reporting by Winnie Cho and Brenda Ko; Editing by Sri Navaratnam

Our Standards: Thomson Reuters Trust Principles.

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