China has cut its two record lending rates for the first time in nearly a year as policymakers push forward with cautious monetary support in a bid to spur stronger growth in the country’s ailing economy.
The People’s Bank of China said on Tuesday that the one-year loan prime rate (LPR) fell 10 basis points to 3.55 percent, while the five-year equivalent interest rate was cut to 4.2 percent from 4.3 percent.
The rates, which are set by major banks and influence the cost of borrowing for businesses and households, mark the authorities’ latest efforts to shift the policy framework toward easing as concern mounts about the trajectory of the world’s second-largest economy.
China’s economy has failed to fully recover six months after authorities lifted severe Covid-19 restrictions that had been in place for three years, with growth under pressure from trade headwinds and a weak real estate sector, which accounts for more than a quarter of activity.
Last week, the People’s Bank of China (PBoC) cut the country’s medium-term lending facility, affecting liquidity in the banking sector, while Beijing unveiled additional tax cuts for businesses. Economists widely expect additional supportive measures in the coming months.
The CSI 300 Chinese stock index was flat after the LPR announcement, while the Hang Seng China Enterprises index of mainland Hong Kong-listed companies fell 1.9 percent. Stocks in real estate developers led the losses after cutting the five-year interest rate by just 10 basis points, highlighting the market’s sensitivity to the prospect of more real estate stimulus.
“The market was expecting up to (0.15 percentage points) on the five-year LPR, because it is mortgage-related and will help boost the real estate market,” said Marcella Zhao, global market analyst at JPMorgan Asset Management. “The important thing right now is to build confidence, so having a better macro outlook and stronger property prices are key.”
Economic data has been disappointing in the months since China reopened, prompting speculation about whether policymakers will remain cautious or pivot on more aggressive stimulus measures to boost demand.
Over the weekend, analysts at Goldman Sachs cut their forecast for full-year Chinese economic growth to 5.4 percent from 6 percent, citing “continued growth headwinds and constrained policy responses.” The government’s official growth target is 5 percent, the lowest in decades, after the economy grew just 3 percent last year.
“Critical support is needed to avoid a confidence trap and keep growth on track,” Citi economists wrote in a report on LPR cuts, adding that they “continue to see a measured stimulus package with a focus on property as reasonable and feasible.”
Other economic indicators indicated continued pressures on confidence. Results of a June survey released by Bank of America on Tuesday showed consumer confidence has fallen further, with only about a third of respondents saying they plan to spend more over the next six months, compared with more than 40 percent in April.
The proportion of respondents who expect home prices to rise over the next year has fallen to just one in five, compared to one in every three months prior.