China Lowers Lending Standards to Revive Weakening Economy

On Monday, China dropped its benchmark lending rate and lowered the mortgage reference rate by a larger margin, adding to last week's softening measures as Beijing ramps up efforts to revitalize an economy hampered by a property crisis and a revival of COVID cases.

The People's Bank of China (PBOC) is treading water in its efforts to spur growth.

Offering too much stimulus may exacerbate inflationary pressures and risk capital flight as the Federal Reserve and other economies aggressively boost interest rates.

However, the PBOC is being forced to act as it strives to keep China's economy on track.

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%.

In January, the one-year LPR was last decreased. The five-year tenor, which was last reduced in May, has an impact on mortgage prices.

"Overall, the sense we get from all of the PBOC's recent comments is that policy is being loosened, but not significantly," said Sheana Yue, Capital Economics' China economist.

"We expect two additional 10-basis-point (bps) drops in PBOC policy rates during the rest of the year, and we continue to project a reserve requirement ratio (RRR) cut next quarter."

The LPR reduction comes after the PBOC startled 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 steam amid slower global growth and rising borrowing rates.

In a recent Reuters survey, 25 of 30 respondents projected a 10-basis-point fall in the one-year LPR.

All respondents in the study predicted a drop in the five-year tenor, with 90% expecting a reduction greater than 10 basis points.

Concerns over growing policy divergence with other major economies drove the Chinese yuan to hit two-year lows. Onshore yuan was last trading at 6.8232 per dollar.

MOMENTUM LOSS

The world's second-largest economy, China's, narrowly avoided falling in the second quarter as widespread lockdowns and a property crisis weighed heavily on consumer and corporate confidence.

Beijing's tough 'zero-COVID' policy continues to be a drag on consumption, and cases have recently rebounded.

To make matters worse, a downturn in global growth and chronic supply-chain snags are weakening China's hopes of a big rebound.

A slew of data released this week revealed that the Chinese economy unexpectedly slowed in July, prompting some global investment firms, including Goldman Sachs and Nomura, to lower their full-year GDP growth predictions for the country.

Goldman Sachs reduced China's full-year GDP growth prediction for 2022 to 3.0% from 3.3% before, falling far short of Beijing's aim of approximately 5.5%. In a tacit admission of the difficulty in attaining the GDP target, the government left it out of a recent high-level policy discussion.

"The asymmetrical LPR cutbacks met our expectations," said Marco Sun, MUFG Bank's chief financial market analyst.

"The policy intention was quite clear... as the 15 basis point cut to the 5-year LPR was meant to boost long-term financing demand." The deeper cut to the mortgage reference rate underscores policymakers' efforts to stabilize the sector after a string of developer defaults and a slump in home sales hammered consumer demand.

According to Reuters, China would guarantee fresh onshore bond issues by a few select private developers last week in order to bolster the sector, which accounts for a quarter of the national GDP.

The LPR drop was required, but "the magnitude of the reduction was insufficient to drive financing demand," according to Xing Zhaopeng, senior China strategist at ANZ.