China slashed its benchmark lending rate and mortgage reference rate by a larger margin on Monday, adding to last week's softening measures, as Beijing intensifies its efforts to revitalize an economy hampered by a property crisis and a revival of COVID cases.
In its efforts to revitalize the economy, the People's Bank of China (PBOC) must walk a tightrope.
Offering excessive stimulus could exacerbate inflationary pressures and increase the danger of capital flight as the Federal Reserve and other economies quickly raise interest rates.
However, sluggish credit demand forces the PBOC's hand as it attempts to stabilize China's economy.
At the central bank's monthly fixing, the one-year loan prime rate (LPR) was reduced by 5 basis points to 3.65%, while the five-year LPR was reduced by 15 basis points to 4.30%.
The annual LPR was most recently decreased in January. The five-year tenor, which was last reduced in May, affects the cost of mortgages.
Sheana Yue, China economist at Capital Economics, remarked, "All of the PBOC's recent comments give the sense that policy is being loosened, but not drastically."
"We predict two additional 10 bps decreases in PBOC policy rates by the end of the year, and we continue to anticipate a reserve requirement ratio (RRR) cut in the next quarter."
The LPR reduction comes after the PBOC startled the markets last week by decreasing the medium term lending facility (MLF) rate and another short-term liquidity instrument, as a slew of recent data indicated the economy was losing pace due to sluggish global growth and rising borrowing costs.
25 of 30 respondents in a Reuters poll conducted last week projected a 10-basis-point cut in the one-year LPR.
All respondents predicted a drop in the five-year tenor, with 90% predicting a reduction greater than 10 basis points.
Concerns over a wider policy divergence with other major economies pushed the Chinese yuan to levels not seen in nearly two years. The domestic yuan last traded at 6.8232 dollars per unit.
LOSS OF MOMENTUM
China's economy, the second-largest in the world, narrowly avoided falling in the second quarter, despite widespread lockdowns and a property crisis that weighed heavily on consumer and corporate confidence.
Beijing's tough 'zero-COVID' campaign continues to be a drag on consumption, and cases have returned in recent weeks.
Adding to the gloom, a downturn in global economy and chronic supply-chain bottlenecks diminish the likelihood of China seeing a robust economic comeback.
The economy unexpectedly slowed in July, according to a slew of data released last week, prompting some global investment firms, including Goldman Sachs and Nomura, to reduce their full-year GDP growth predictions for China.
China's full-year GDP growth prediction for 2022 was slashed by Goldman Sachs from 3.3% to 3.0%, well below Beijing's aim of 5.5%. In a sly nod to the difficulty of achieving the GDP target, the government deleted a mention of it from a recent high-profile policy meeting.
MUFG Bank's chief financial market analyst, Marco Sun, stated that the asymmetrical LPR cutbacks were in accordance with forecasts.
The 15 bps decrease to the 5-year LPR was intended to encourage long-term financing demand. The deeper fall to the mortgage reference rate underscores efforts by officials to stabilize the industry following a run of defaults among developers and a decline in home sales that weakened consumer demand.
China would guarantee future onshore bond issuance by a select few private developers to assist the sector, which accounts for a quarter of the national GDP, according to sources who spoke to Reuters last week.
The LPR reduction was required, but its magnitude was insufficient to promote financing demand, according to Xing Zhaopeng, senior China strategist at ANZ.
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