China set to cut key lending criteria as economy slows

SHANGHAI/SINGAPORE (Reuters) – China is set to cut its key lending standards significantly on Tuesday in the first such easing in 10 months, a Reuters survey showed, as authorities seek to shore up a slowing recovery in the second-largest economy world.

Recent economic data showed that the retail and factory sectors struggled to sustain the momentum seen in the first quarter, raising concerns that China’s post-COVID-19 comeback could be a drag. stop this year and cause massive job losses.

The People’s Bank of China (PBOC) lowered its short-term and medium-term key rates last week, signaling that it is about to embark on a new wave of monetary easing in a bid to accelerate the reprise.

In a poll of 32 market watchers, all participants predicted reductions in the one-year loan prime rate (LPR) and five-year term.

Twenty-one, or nearly 66%, of all respondents expected the one-year LPR – on which most new and existing loans are based – to be cut by 10 basis points to 3.55 % against 3.65%. Others projected the reduction to be between 5 and 15 basis points.

Meanwhile, 16, or half, of analysts and traders polled by Reuters said they expected a deeper cut of at least 15 basis points in the five-year LPR, which serves as a benchmark mortgage rate, to stimulate housing demand and support home ownership. sector. Fourteen other respondents predicted that the five-year duration would be reduced by 10 basis points to 4.2%, down from 4.3% currently.

China last reduced both LPRs in August 2022.

“Traditionally, the Medium Term Lending Facility (MLF) and Open Market Operations (OMO) rate cuts mean we can expect a similar reduction in the bank prime rate relatively soon,” David said. Chao, Global Market Strategist for Asia. Pacific at Invesco.

“However, the biggest risk is that rate cuts may be ineffective when households and businesses are overly conservative, busy deleveraging and paying down debt.”

Chao expects the policymaker to introduce additional targeted fiscal and stimulus measures.

China’s cabinet met on Friday to discuss measures to boost the economy’s growth and pledged to deploy more policy support.

Despite a strong consensus on the LPR cuts on Tuesday, market participants are divided on the scale of the cuts. Some expect the benchmark mortgage rate to be lowered by a bigger cut to help the struggling real estate sector.

“We expect an asymmetric decline of five basis points on the LPR year over year and 15 basis points on the LPR over five years as the real estate sector clearly warrants increased policy support,” Citi analysts said. in a note.

“We continue to view the July Politburo meeting as a window to monitor whether larger moves follow.”

Several global investment banks cut their gross domestic product growth forecasts for China in 2023 after May data showed the post-COVID recovery was faltering.

The LPR normally charged to banks’ best customers is calculated monthly after 18 nominated commercial banks submit proposed rates to the central bank.

(Reporting by Li Hongwei, Winni Zhou and Tom Westbrook; Editing by Sam Holmes)

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