Chinese banks disappoint with smaller lending rate cuts
CHINESE banks made a smaller-than-expected cut to their benchmark lending rate on Monday (Aug 21) and avoided trimming the reference rate for mortgages, despite the central bank putting pressure on lenders to boost loans.
The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.45 per cent from 3.55 per cent, a slighter reduction than what most economists surveyed by Bloomberg had expected. The five-year rate, a reference for mortgages, was unexpectedly kept steady at 4.2 per cent, according to data from the People’s Bank of China (PBOC). Most economists had predicted a 15 basis point cut.
“This is a surprising result, showing that banks are not well prepared. We believe the cuts will continue in the next few months,” said Xing Zhaopeng, senior China strategist, Australia & New Zealand Banking Group.
The loan rates are based on the interest rates that 18 banks offer their best customers, and are published by the PBOC monthly. They are quoted as a spread over the central bank’s one-year policy rate, or the medium-term lending facility rate, which was cut by 15 basis points earlier this month – a surprise move that marked the steepest reduction since 2020.
Stocks in China and Hong Kong declined at the market open on Monday. The MSCI China Index slid as much as 1.1 per cent to its lowest since Jun 1. The offshore yuan extended a modest decline against the US dollar, weakening about 0.2 per cent. China 10-year bond yields fell one basis point to 2.55 per cent.
Recent economic data showed a slump in borrowing demand, deflation pressure and falling export orders in July, prompting several banks to cut their growth forecasts for the year to below 5 per cent. Investors are also concerned about contagion risks following a liquidity crisis at a major shadow bank.
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The central bank and financial regulators met recently with bank executives and told lenders again to boost loans to support a recovery – yet another sign of how concerned policymakers have grown about the deteriorating economic outlook.
Even so, the unexpectedly small actions on Monday send a signal “that the authorities don’t want the property market to overheat”, said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle.
“There has been speculation on whether the government will completely let loose property policies after the Politburo meeting omitted the pledge that housing is not for speculation,” he said, referring to a meeting held in July by the Communist Party’s top decision-making body. The absence of that slogan, a signature of President Xi Jinping, fuelled speculation that some tough restrictions on property would be reversed.
“The signal now is that there will still be policy controls on the property sector, just that they will be optimised,” Pang said, adding that the authorities have also introduced a mechanism for lowering new mortgage rates already, lessening the need to adjust the five-year LPR.
Policymakers may also have judged that cutting the mortgage reference rate “is not the most effective tool”, said Frances Cheung, rates strategist at OCBC.
“Either that’s it, or the regulators are mulling something more substantial in supporting the property sector,” she added.
Many economists expect the PBOC to reduce the reserve requirement ratio for banks and further trim interest rates in coming months.
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