China has cut its benchmark rate for mortgage lending for the first time in nearly two years, adding to a cycle of gradual monetary easing as policymakers seek to counter a loss of economic momentum.
The five-year loan prime rate, which is typically used to price mortgages, was lowered from 4.65 per cent to 4.6 per cent on Thursday. The one-year equivalent, widely used for other forms of lending, was cut from 3.8 per cent to 3.7 per cent, following a previous reduction in December.
The measures were expected following a People’s Bank of China press conference on Tuesday at which officials hinted at further easing against the backdrop of a weakening economy.
On Monday, the National Bureau of Statistics unveiled data showing the slowest pace of year-on-year growth in almost 18 months. The government is dealing with a slowdown in the country’s crucial real estate sector and lingering weaknesses in consumption.
“These cuts are too small to have a material impact, as they are unlikely sufficient to clear up the real bottlenecks and because rates on existing mortgage loans will not be reset this year,” noted Ting Lu, chief China economist at Nomura.
China cut several important rates in early 2020, in response to the economic hit from its initial coronavirus outbreak. Later that year, at a time of mounting concerns over asset bubbles, it introduced tightening measures that limited leverage at real estate developers.
A liquidity crisis across the property sector, centred around the drawn-out default of Evergrande, the most indebted developer in the world, has hit land and housing sales and put pressure on policymakers to support the economy.
The PBoC cut the reserve requirement ratio, a metric that influences bank lending, several times last year, but did not tweak its benchmark loan prime rates until December.
Chinese markets were little moved on Thursday, with the CSI 300 index of large Shanghai- and Shenzhen-listed stocks up only 0.9 per cent. Analysts said this was partly because the PBoC cut its medium-term lending rate on Monday, which acts as a floor for the LPR.
“Today’s LPR cut was expected and had already been priced in by the market,” said Bruce Pang, head of research at China Renaissance.
Pang added that Chinese shares had been subdued following recent comments from top officials, who had stopped short of promising more substantial easing even as Beijing grapples with a number of Covid-19 outbreaks across the country.
“The PBoC may do more easing, but not in the form of another rate cut in the near term unless there are sustained headwinds for China’s recovery,” Pang said.