Borrowing costs

Chinese banks cut borrowing costs to counter economic slowdown

PIXABAY.COM

Chinese banks lowered borrowing costs for the first time in 20 months, presaging increased monetary support for an economy under pressure from a housing collapse, low private consumption and sporadic epidemics virus.

The one-year loan prime rate (LPR) was set at 3.8% from 3.85% in November, the first drop since April 2020, according to a statement from the People’s Bank of China (PBoC) on Monday. The prime rate for five-year loans, the benchmark for mortgage loans, remained unchanged at 4.65%.

The reduction comes as the central bank and government step up support for the economy and follow the PBoC’s decision earlier this month to reduce the amount of liquidity banks are required to hold in reserve, freeing up 1 200 billion yuan ($ 188 billion) of cheap long-term financing. for banks. Monday’s move means stronger companies will be able to borrow at a slightly cheaper rate and also reinforces the shift to softer policy as leaders aim for stability in 2022.

“The drop reinforces our view that Chinese authorities are increasingly open to the possibility of lower interest rates in the face of headwinds threatening the economy,” said Xing Zhaopeng, senior Chinese strategist at Australia & New Zealand Banking Group Ltd.

Although technically not a policy interest rate, the LPR is based on the lending rates of 18 banks for their best customers and is considered China’s de facto benchmark funding cost. since 2019. The reduction will reduce the overall burden of Chinese enterprises’ interest payments by 80 billion yuan. per year from next year, according to Xing, who said there were about 160 trillion yuan in one-year LPR-indexed loans.

The CSI 300 real estate index climbed to 2.6%. Gemdale Corp. and Poly Developments and Holdings Group Co. led the gains, each increasing at least 3.5%. The yield on Chinese 10-year bonds was little changed at 2.85%, while the offshore yuan stabilized at 6.3865 to the dollar.

This move reinforces the easing bias of the PBoC, and other measures could be put in place if the economic slowdown worsens, including further reductions in the reserve requirement ratio (RRR) as well as a cut in policy rates. , according to analysts. The PBoC pledged last week to continue to harness the potential of interest rate reforms and reduce overall corporate finance costs.

“The signal is obvious that we are in an easing cycle,” said He Wei, analyst at Gavekal Dragonomics, who expects policy rates from the PBoC, or rates on the medium-term lending facility (MLF ) and the seven-day repo. ratings, will be lowered in the first half of next year.

Another sign of support, China will endeavor to support “quality” real estate developers buying real estate projects from large companies in difficulty, Financial news, a newspaper co-founded by the PBoC, reported on Monday, citing an opinion from the central bank and banking regulator.

Bruce Pang, head of macro and policy research at China Renaissance Securities Hong Kong Ltd., said the next monetary easing window could be at the end of January, when the PBoC could act to cut the RRR, policy rates or roll out policies. more structural tools depending on the state of the economy as well as the impact of previous policies.

“In the short term, we may not see the PBoC adding more metrics,” said Qi Gao, 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.

ANZ’s Xing echoed the view that the LPR cut indicates that there may not be a cut in policy rates in the short term, but expects another RRR cut early in the year. next year to cushion the growing credit risks in the real estate industry.

The LPR is communicated by the banks in the form of a spread on the interest rate on medium-term loans of the PBoC. With the PBoC keeping the MLF rate unchanged last week, most economists Bloomberg polled expected the LPR to remain stable as well.

Yet the chorus for a rate cut has intensified recently, and interest rate swaps have also shown traders betting that the LPR will be cut soon. – Bloomberg