In a move that fell short of economists’ expectations, China’s central bank, The People’s Bank of China (PBOC), cut its one-year loan prime rate from 3.55% to 3.45%. This rate, which serves as the benchmark for most household and corporate loans in the country, only saw a reduction of 10 basis points, a figure lower than the 15 basis points that a majority of economists predicted in a Reuters poll. This decision marks the second time within three months that China has reduced this rate.

However, the PBOC left its five-year loan prime rate, the primary determinant for most mortgages in China, unchanged at 4.2%, despite economists predicting a 15 basis point cut. This decision comes amidst mounting default risks and liquidity problems in the country’s property sector, with giants like Country Garden teetering on the brink of default and Evergrande recently filing for bankruptcy protection.

China Cuts One-Year Loan Prime Rate, Keeps Five-Year Rate Unchanged

Unexpected Decisions Amid Economic Slowdown

In a move that fell short of economists’ expectations, China’s central bank, the People’s Bank of China (PBOC), cut its one-year loan prime rate from 3.55% to 3.45% on Monday. This marks the second time in three months that the country has lowered this rate, which is used as a benchmark for most household and corporate loans in China. Experts had predicted a 15 basis point cut, but the actual decrease was only 10 basis points.

Interestingly, the five-year loan prime rate, which serves as the peg for most mortgages in the country, was left unchanged at 4.2%. This decision also defied economists’ predictions for a 15 basis point reduction amid ongoing liquidity issues in China’s property sector. Notably, real estate giants such as Country Garden and Evergrande are facing serious financial difficulties, with the latter recently filing for bankruptcy protection.

PBOC’s Stance and Market Reaction

According to Julian Evans-Pritchard, the head of China at Capital Economics, the less aggressive rate cuts by the PBOC suggest that the central bank is unlikely to resort to larger cuts to boost credit demand. He added that hopes for an economic rebound largely depend on the prospect of greater fiscal support.

Following these decisions, the Hang Seng Index dipped by nearly 1.8%, hitting its lowest point since late November. The China Enterprises Index and the CSI 300 index also experienced significant drops, reflecting the market’s disappointment with the PBOC’s actions.

Recent Developments and Future Steps

These changes come on the heels of surprise cuts to short- and medium-term lending rates last week, following data indicating weak credit growth and emerging deflation risks. The PBOC has stated that it will coordinate financial support to manage local government debt risks and lower systemic risks. It also plans to adjust credit policies for the property sector and lower financing costs for the economy.

Last week, the PBOC also reduced the rate on one-year medium-term lending facility loans to some financial institutions from 2.65% to 2.50%, a total of 401 billion yuan ($55.25 billion). The overnight, seven-day, and one-month standing lending facility rates were each trimmed by 10 basis points.

Takeaways

China’s latest monetary policy decisions, while unexpected, reflect a cautious approach by the central bank amid economic slowdown and property sector challenges. The rate cuts seem to be a measured effort to stimulate the economy without adding undue pressure to the already strained property sector. The effectiveness of these actions will largely depend on the extent of fiscal support and how the bank manages the ongoing economic risks.