Borrowing costs

Chinese banks cut borrowing costs as PBOC signals easing

Chinese lenders slashed borrowing costs for a second straight month after the central bank cut key lending rates and promised further easing to stabilize the economy.

The one-year prime lending rate was cut 10 basis points to 3.7% on Thursday, in line with forecasts from a Bloomberg survey of economists. The five-year rate, a benchmark for long-term loans, including mortgages, was cut five basis points to 4.6%, a smaller cut than expected.

LPRs, which are the de facto benchmark lending rates, are based on quotes that 18 banks offer their best customers and are submitted to the People’s Bank of China. The one-year rate generally moves in parallel with the one-year medium-term lending facility rate, which the PBOC cut 10 basis points on Monday, the first cut in nearly two years.

A housing market crackdown last year rocked the economy and financial markets, prompting the central bank to shift into easing mode, with interest rate cuts and promises to open its debt box wider. political tools. The smaller-than-expected drop in the five-year loan rate suggests that the authorities remain cautious on the housing market.

“A smaller reduction, in my view, indicates that policymakers are in no rush to ease measures on housing finance,” said Hao Zhou, senior emerging markets economist at Commerzbank AG.

“Real estate policy is still in the spotlight for now, and some policy vacillation indicates that debt issues continue to cloud over.”

What Bloomberg Economics says…

The PBOC is just getting started – we see other policies
rate cuts lowering borrowing costs this year
the authorities are taking steps to counter a slowdown in growth and restore
some stability to the swoon real estate sector.
The smaller decline in LPR over five years compared to the
LPR of the year in the past two months may reflect the
intention to avoid inflating house prices.
— David Qu, Chinese economy

Yields on China’s 10-year sovereign bonds fell a basis point to 2.73%, slightly extending this week’s declines as easing betting pushed yields to the lowest levels since May 2020. Property developers and property-related companies, such as appliance makers, were among the top gainers in China’s benchmark CSI 300 index, which rose 1%. A Bloomberg gauge of Chinese automakers jumped 3.7% in early morning trading.

The one-year LPR was lowered by five basis points in December, after the central bank reduced the amount of cash banks must hold in reserve to boost liquidity, leading to lower funding costs.

Additional easing

Economists expect the PBOC to cut interest rates further and cut the reserve requirement ratio in the coming months, as officials pledged swift action to halt a rapid slowdown in growth .

“We expect further easing measures to follow in the coming months, but policymakers still seem reluctant to stage a strong pick-up in credit growth,” wrote Sheana Yue, China economist at Capital Economics Ltd. ., in a note Thursday.

Yue expects the one-year LPR to be cut another 20 basis points in the first half of this year.

Iris Pang, chief economist for Greater China at ING Bank NV, expects further rate cuts in March after the annual legislative sessions, if COVID outbreaks continue to spread across the country.

Sheng Songcheng, former director of the PBOC’s statistics and analysis department, said the central bank only has a few months to ease monetary policy, before inflation trends up in the second half of the year. and interest rate hikes in the United States are only putting pressure. on the yuan.

–With assistance from Tania Chen and Shikhar Balwani.