# China steps up easing, cuts lending benchmarks to revive faltering economy
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-22
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: China Cuts Benchmark Rates to Boost Economy
Meta Description: China has cut its benchmark lending rate and mortgage reference, stepping up efforts to boost the economy hit by a property crisis and rising COVID cases.
URL: https://financedigest.com/china-steps-up-easing-cuts-lending-benchmarks-to-revive-faltering-economyhtml

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By Winni Zhou and Brenda Goh

SHANGHAI (Reuters) -China cut its benchmark lending rate and lowered the mortgage reference by a bigger margin on Monday, adding to last week’s easing measures, as Beijing boosts efforts to revive an economy hobbled by a property crisis and a resurgence of COVID cases.

The People’s Bank of China (PBOC) is walking a tight rope in its efforts to revive growth. Offering too much of stimulus could add to inflation pressures and risk capital flight as the Federal Reserve and other economies [raise interest rates](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") aggressively.

However, weak [credit demand is forcing the PBOC’s hand as it tries to keep China’s](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") economy on an even keel.

The one-year loan prime rate (LPR) was lowered by 5 basis points to 3.65% at the [central bank’s](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") monthly fixing on Monday, while the five-year LPR was slashed by 15 basis points to 4.30%.

The one-year LPR was last reduced in January. The five-year tenor, which was last lowered in May, influences the [pricing of home mortgages](https://www.financedigest.com/home-prices-are-setting-records-while-mortgage-rates-plunge-is-it-time-to-refinance.html "Home Prices Are Setting Records While Mortgage Rates Plunge – Is It Time To Refinance?").

All told, the impression we get from all the PBOC’s recent announcements is that policy is being eased but not dramatically,” said Sheana Yue, [China economist at Capital Economics](https://www.financedigest.com/worst-flooding-since-1998-leaves-33bn-economic-toll-in-china-according-to-aon-catastrophe-report.html "Worst flooding since 1998 leaves bn economic toll in China, according to Aon catastrophe report").

We anticipate two more 10 bps [cuts to the PBOC policy rates over the remainder of this year](https://www.financedigest.com/inpost-sees-better-margin-in-poland-plans-no-job-cuts-this-year.html "InPost sees better margin in Poland, plans no job cuts this year") and continue to forecast a reserve requirement ratio (RRR) cut next quarter.

The LPR cuts come after the PBOC surprised markets last week by lowering the medium term lending facility (MLF) rate and another short-term liquidity tool, as a string of recent [data showed the economy](https://www.financedigest.com/stocks-yields-fall-data-suggests-u-s-economy-cooling.html "Stocks, yields fall; data suggests U.S. economy cooling") was losing momentum amid slowing global growth and rising borrowing costs in many developed countries.

Shares of Chinese developers listed in [Hong Kong](https://www.financedigest.com/citadel-accelerates-hiring-push-in-hong-kong-and-london.html "Citadel accelerates hiring push in Hong Kong and London") rose 1.7%, while China-listed property stocks were relatively stable in morning deals.

But worries over widening policy divergence with other major [economies dragged the Chinese](https://www.financedigest.com/a-two-way-street-chinese-investment-in-the-uk-will-benefit-both-economies.html "A TWO WAY STREET: CHINESE INVESTMENT IN THE UK WILL BENEFIT BOTH ECONOMIES") yuan, to near two-year lows. The onshore [yuan last traded at 6.8258 per dollar](https://www.financedigest.com/dollar-slips-yuan-gains-on-china-pmi-hot-inflation-lifts-euro.html "Dollar slips, yuan gains on China PMI; hot inflation lifts euro").

In a [Reuters poll](https://www.financedigest.com/japans-economy-likely-shrank-in-q3-on-weak-consumption-output-reuters-poll.html "Japan’s economy likely shrank in Q3 on weak consumption, output – Reuters poll") conducted last week, 25 out of 30 respondents predicted a 10-basis-point reduction to the one-year LPR. All of those in the poll also projected a cut to the five-year tenor, including 90% of them forecasting a reduction larger than 10 bps.

TESTING TIME FOR PBOC

China’s economy, the world’s second biggest, narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and a [property crisis took a heavy toll on consumer and business](https://www.financedigest.com/the-importance-of-property-care-looking-after-your-business.html "The Importance of Property Care: Looking After Your Business") confidence.

[Beijing’s strict ‘zero-COVID’](https://www.financedigest.com/beijing-nervously-returns-to-work-as-china-doubles-down-on-zero-covid-policy.html "Beijing nervously returns to work as China doubles down on ‘zero-COVID’ policy") strategy remains a drag on consumption, and over recent weeks cases have rebounded again. Adding to the gloom, a slowdown in [global growth](https://www.financedigest.com/global-growth-headed-down-as-inflation-surge-to-endure.html "Global growth headed down as inflation surge to endure") and persistent supply-chain snags are undermining chances of a strong revival in China.

A raft of data, released last week, showed the economy unexpectedly slowed in July and prompted some [global investment](https://www.financedigest.com/international-investment-soars-as-albania-steps-into-global-spotlight.html "INTERNATIONAL INVESTMENT SOARS AS ALBANIA STEPS INTO GLOBAL SPOTLIGHT") banks, including Goldman Sachs and Nomura, to revise down their full-year GDP growth forecasts for China.

Goldman Sachs lowered [China’s 2022 full-year GDP growth forecast to 3.0%](https://www.financedigest.com/exclusive-foxconn-woes-could-hit-at-least-30-of-iphone-nov-shipments-from-china-plant-source.html "Exclusive: Foxconn woes could hit at least 30% of iPhone Nov shipments from China plant – source") from 3.3% previously, far below Beijing’s target of around 5.5%. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a [recent high profile policy meeting](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout").

The deeper [cut to the mortgage reference rate](https://www.financedigest.com/oil-gains-as-russian-supply-cuts-temper-concerns-over-rate-hikes-high-stocks.html "Oil gains as Russian supply cuts temper concerns over rate hikes, high stocks") underlines efforts by policymakers to stabilize the property sector after a string of defaults among developers and a slump in home sales hammered consumer demand.

Capital Economics’ Yue said the weakness in loan demand is partly structural, “reflecting a loss of confidence in the [housing market and the uncertainty caused by recurrent disruptions from China’s](https://www.financedigest.com/us-house-committee-chair-concerned-by-tesla-deals-in-china.html "US House committee chair ‘concerned’ by Tesla deals in China") zero-COVID strategy.

These are drags that can’t be easily solved by [monetary policy.”](https://www.financedigest.com/uks-ftse-100-dips-on-scope-of-tighter-monetary-policy-informa-jumps.html "UK’s FTSE 100 dips on scope of tighter monetary policy; Informa jumps")

Sources last week told Reuters that China will guarantee new onshore bond issues by a few select private developers to support the sector, which accounts for a [quarter of the national GDP](https://www.financedigest.com/german-gdp-contracted-by-0-4-in-the-fourth-quarter.html "German GDP contracted by 0.4% in the fourth quarter").

The LPR cut was necessary, “but the [size of the reduction was not enough to stimulate financing demand,”](https://www.financedigest.com/catharanthine-market-2022-research-on-user-demand-size-applications-key-players.html "Catharanthine Market 2022 Research on User Demand, Size, Applications, Key Players:") said senior China strategist at ANZ, Xing Zhaopeng, who expects the one-year LPR could be cut further.

Goldman Sachs economists also predicted more easing, but noted that policymakers were [facing a testing](https://www.financedigest.com/china-arrivals-in-uk-next-week-will-not-face-compulsory-covid-tests-independent.html "China arrivals in UK next week will not face compulsory COVID tests -Independent") time.

The economists said the PBOC might not be in a “rush to deliver more [interest rate cuts,”](https://www.financedigest.com/interest-rates-are-cut-to-an-all-time-low-what-will-this-mean-for-small-businesses.html "Interest rates are cut to an all-time low. What will this mean for small businesses?") because of “rising food prices and potential spillover effects from developed markets’ monetary policy tightening.

(Reporting by Winni Zhou and Brenda Goh; Editing by Shri Navaratnam)


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