China Cuts Lending Benchmarks To Revive Faltering Economy

China slashed its benchmark lending rate and lowered the mortgage reference by a greater margin on Monday, adding to last week's softening measures, as Beijing pushes attempts to revitalize an economy plagued by a property crisis and a recurrence of COVID cases.

The People's Bank of China (PBOC) is treading a tight edge in its efforts to restart economy.

Offering too much fiscal stimulus could contribute to inflation pressures and risk capital flight as the Federal Reserve and other economies boost interest rates quickly.

However, weak credit demand is forcing the PBOC to stabilize China's economy.

At the central bank's monthly fixing, the one-year loan prime rate (LPR) dropped 5 basis points to 3.65% and the five-year LPR dropped 15 basis points to 4.30%.

The one-year LPR was last decreased in January. The five-year tenor, which was last lowered in May, determines the pricing of home mortgages.

"All in all, the PBOC's recent announcements suggest policy is being eased but not dramatically," said Capital Economics China economist Sheana Yue.

"We expect two additional 10 bps PBOC policy rate reduction this year and a reserve requirement ratio (RRR) cut next quarter."

The LPR cut comes after the PBOC surprised markets last week by lowering the medium term lending facility (MLF) rate and another short-term liquidity tool, as a string of recent data showed the economy was losing momentum amid slowing global growth and rising borrowing costs.

25 of 30 respondents to a Reuters poll last week predicted a 10-basis-point drop in the one-year LPR.

All poll participants predicted a five-year tenor cut, with 90% predicting a cut greater than 10 bps.

Worries over deepening policy divergence with other major countries drove the Chinese yuan, to near two-year lows. Onshore yuan traded at 6.8232 per dollar.

LOSS OF MOMENTUM

China's second-largest economy narrowly avoided a second-quarter contraction as widespread lockdowns and a property crisis eroded consumer and business confidence.

Beijing's strict 'zero-COVID' strategy remains a drag on consumption, and over recent weeks cases have rebounded again.

Adding to the gloom, a slowdown in global growth and persistent supply-chain snags are undermining chances of a strong revival in China.

A spate of statistics, released last week, revealed the economy unexpectedly slowed in July and prompted some global investment firms, including Goldman Sachs and Nomura, to adjust down their full-year GDP growth predictions for China.

Goldman Sachs downgraded China's 2022 full-year GDP growth prediction to 3.0% from 3.3% earlier, considerably below Beijing's aim of approximately 5.5%. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a recent high profile policy meeting.

"The asymmetrical LPR cuts came in line with our expectations," said Marco Sun, chief financial market analyst at MUFG Bank.

"The policy intention was quite obvious... as the 15 bps cut to the 5-year LPR was meant to boost long-term financing demand." After a string of developer defaults and a drop in home sales, policymakers cut the mortgage reference rate deeper to stabilize the sector.

Last week, sources told Reuters that China will guarantee new onshore bond issues by a few private developers to support the sector, which accounts for 25% of GDP.

ANZ senior China strategist Xing Zhaopeng said the LPR cut was necessary, "but the size of the reduction was not enough to stimulate financing demand."