China has surprisingly lowered interest rates to boost its economy

China cut its benchmark mortgage rate by a sharp margin on Friday, the second cut this year, as Beijing seeks to revive the ailing housing sector to boost its economy. Top officials have pledged further steps to combat the recession in the world’s second-largest economy, which has been hit by the COVID-19 outbreak, which has imposed strict measures and restrictions on mobility, causing widespread disruption. Many market participants believe Friday’s move was also a response to Chinese Premier Li Keqiang’s policy-accelerating policy coordination and a call for the economy to return to normal quickly. Julian Evans-Pritchard of Capital Economics said in a statement: “Reducing the prime rate on today’s five-year loan will help revive home sales, which have been declining lately.” “But the lack of a one-year reduction in LPR suggests that the PBOC seeks to continue to simplify in a targeted manner and we should not expect the kind of large-scale stimulus we saw in 2020.” China lowered its monthly five-year lending rate (LPR) by 15 basis points to 4.45%, the biggest cut since China revised the interest rate mechanism in 2019 and more than the 5 or 10 basis points predicted by most Reuters poll one-year LPR 3.70. Was unchanged at%. The country’s benchmark stock index, the Shanghai Composite Index, rose nearly 1% in trading at the start of Friday’s rate cut. The move failed to stimulate mainland-listed property stocks, which were flat, although Hong Kong-listed developers have risen slightly. Many private-sector economists expect the Chinese economy to shrink this quarter year-on-year, compared to 4.8% growth in the first quarter. Indicators of lending, industrial production and retail sales show that covid-related strict measures and mobility restrictions are taking a heavy toll. A key driver of growth is the real estate sector, which policymakers are trying to reverse. Related industries such as real estate and construction account for more than a quarter of the economy. Chinese home sales fell to their fastest pace in nearly 16 years in April, while new home prices fell month-on-month for the first time since December, hit by a massive COVID-19 lockdown amid weak demand. “Policymakers may have agreed on whether to revive the real estate sector,” said Jing Zhaoping, a senior China strategist at ANZ, who predicted a simpler move. Limited space for cuts The central bank has promised to boost support for the slowing economy, but analysts say raising the Federal Reserve’s interest rates could limit policy easing due to concerns about capital outflows. Capital Economics believes that the lack of a one-year LPR cut suggests that the central bank may be concerned about the outflow of capital and the potential impact of the yuan. LPR is a credit reference rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use five-year LPR for mortgage rates, while most other loans are based on one-year interest rates. Both interest rates were cut in January to support the economy. Marco Sun, chief financial market analyst at MUFG Bank, said Friday’s cut suggests that “China’s economic growth has faced increasing resistance this year.” Eighteen out of 28 traders and analysts in the Reuters poll predicted interest rate cuts, including 12 who expected a reduction of 5 basis points for each tenor. A campaign by the authorities last year to reduce high levels of debt has turned into a liquidity crisis for some large developers, with bond defaulters and projects shutting down, shaking global financial markets. Since the end of last year, Beijing has taken steps to revive the real estate sector. These include making it easier for large and state developers to raise capital, relaxing escrow account rules for pre-sale funds, and allowing some local governments to reduce mortgage rates and down payment ratios. This week, tax authorities reduced mortgage rates for some home buyers. But those measures and Friday’s cut alone will not ease the funding pressure for developers, many of whom are struggling to refinance their loans. Property stocks have risen lately, but the muted response to Friday’s cut suggests that some investors believe it is not enough to revive the ailing sector.

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