Chinese banks cut borrowing costs to counter economic slowdown
The one-year loan prime rate was set at 3.8% versus 3.85% in November, the first reduction since April 2020, according to a statement from the People’s Bank of China on Monday.
Chinese banks lowered borrowing costs for the first time in 20 months, foreshadowing more monetary support to an economy showing strain from a property slump, weak private consumption and sporadic virus outbreaks.
The one-year loan prime rate was set at 3.8% versus 3.85% in November, the first reduction since April 2020, according to a statement from the People’s Bank of China on Monday. The five-year loan prime rate, a reference for mortgages, was unchanged at 4.65%.
The cut comes as the central bank and government increase support for the economy and follows the PBOC’s decision earlier this month to cut the amount of cash banks must hold in reserve, which freed up 1.2 trillion yuan ($188 billion) of cheap long-term funding for banks. Monday’s decision means the strongest companies will be able to borrow at a slightly cheaper rate and also reinforces the shift to looser policy as the leadership aims for stability in 2022.
“The cut reinforces our view that China’s authorities are increasingly open to the possibility of an interest-rate cut amid looming headwinds to the economy,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd.
While technically not a policy interest rate, the LPR is based on 18 banks’ loan rates for their best customers and has been considered China’s de facto benchmark funding cost since 2019. The cut will lower overall interest payment burden of Chinese companies by 80 billion yuan per year starting next year, according to Xing, who said there are around 160 trillion yuan of loans pegged to the one-year LPR.
The CSI 300 Real Estate Index climbed as much as 2.6%. Gemdale Corp. and Poly Developments and Holdings Group Co. led the gains, each rising at least 3.5%. China’s 10-year note yield was little changed at 2.85%, while the offshore yuan steadied at 6.3865 to the dollar.
The move strengthens the easing bias of the PBOC, and more measures could be rolled out if the economic slowdown deepens, including further cuts to the reserve requirement ratio as well as reduction of policy rates, according to analysts. The PBOC vowed last week to continue to unleash the potential of interest rate reforms and guide overall corporate financing costs lower.
“The signal is obvious that we are in an easing cycle,” said He Wei, an analyst at Gavekal Dragonomics, who expects the PBOC’s policy rates, or the rates for the medium-term lending facility and seven-day reverse repurchase notes, will be lowered in the first half of next year.
In another sign of support, China will focus on supporting “quality” property developers buying the real estate projects of large companies which are experiencing difficulties, Financial News, a newspaper co-founded by the PBOC, reported Monday, citing a notice from the central bank and the banking regulator.
Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd., said the next window for monetary easing could be late January, when the PBOC may act to cut the RRR, policy rates or roll out more structural tools depending on the economy’s state as well previous policies’ impact.
“In the near term we may not see PBOC adding more measure,” said Qi Gao, a strategist at Bank of Nova Scotia. The PBOC could cut the MLF rate next year and lower the RRR again in the first half of 2022, he said.
Xing of ANZ echoed the view that the LPR reduction signals there may not be policy rate cut in the short term, but forecast another RRR cut early next year to cushion mounting credit risks in the property sector.
The LPR is reported by banks in the form of a spread over the interest rate on PBOC’s medium-term loans. With the PBOC having kept the MLF rate unchanged last week, most economists polled by Bloomberg had expected the LPR to remain steady as well.
Still, the chorus for a rate cut has grown louder recently, and interest rate swaps also showed traders had been betting the LPR would soon be cut.