Beijing sends strong policy easing signals, cuts mortgage reference rate for first time in 2 years

CHINA sent a strong signal of its easing monetary stance on Thursday (Jan 20), slashing borrowing costs for the second consecutive month, and lowering the mortgage reference rate for the first time in nearly 2 years.

The People's Bank of China (PBOC), the country's central bank, announced the 1-year loan prime rate (LPR) was cut by 10 basis points to 3.70 per cent, from 3.80 per cent. Most new and outstanding loans in China are based on the 1-year LPR.

The 5-year LPR - which influences the pricing of mortgages - was reduced by 5 basis points to 4.60 per cent from 4.65 per cent - the first reduction since April 2020.

While the cuts were expected by the market, and reinforced by the dovish monetary policy tone set by the deputy governor of PBOC on Jan 18, some analysts felt they were stronger than expected given that this is the second consecutive month of seeing the 1-year LPR to be adjusted lower.

On Dec 15, the reserve requirement ratio (RRR) was cut by 50 basis points, a move the government said would inject 1.2 trillion yuan (S$254.8 billion) in long-term liquidity into the economy. At the start of the week, on Jan 17, the PBOC announced a 10 basis point cut in key interest rate for the first time in almost 2 years.

According to a Hong Kong analyst, the last round of consecutive LPR downward adjustment was seen in the first quarter of 2020, when the 1-year and 5-year LPR were lowered to mitigate the impact from the Covid-19 pandemic.

Margaret Yang, IG's DailyFX strategist, expects the news to boost the Hong Kong stock market despite a sour lead on Wall Street.

"The PBOC's stance to ease monetary policy is another positive catalyst for stocks, especially the rate-sensitive real estate and technology sectors," Yang said. At the time of writing, the Hang Seng Index was up more than 2 per cent, at 24,689.32.

Despite Beijing's accommodative stance, analysts warned that the key risk remains, ahead of the mass travel season during the Chinese New Year (CNY) and the upcoming winter Olympics.

Goldman Sachs' experts are expecting another 50 basis point RRR cut in the first quarter and an additional 10 basis point policy rate cut by the end of the second quarter.

"We expect the government to ramp up its demand-side stimulus more visibly in or after March this year, when some near-term constraints such as Covid-related restrictions and production restrictions during the Beijing Winter Olympics are set to ease. At that time, weather conditions could also turn more favourable for outdoor constructions, setting the stage for infrastructure building to boost the economy," they said.

Meanwhile, they cautioned against over-reading the PBOC's open market operations in the coming weeks for clues on monetary easing due to "significant distortions" from travel restrictions due to the Covid-19.

"We expect another 'staying local' CNY holiday this year, like what we saw in early 2021. This will again constrain seasonal liquidity demand in the run-up to the CNY holiday, and affect the PBOC's liquidity injection in coming weeks," they said.

Goldman estimates the PBOC will need to inject 600 billion yuan for the upcoming CNY holiday, higher than the 390 billion yuan for the 2021 CNY holiday, but much lower than around 2 trillion yuan in pre-pandemic years. The PBOC has already net injected 200 billion yuan on Jan 17 via its monthly medium-term lending facility operation.