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Friday, February 23, 2024

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China Eases Lending Standards First Time In 10 Months

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According to a survey by British news agency Reuters, China is likely to ease lending standards on Tuesday, the first time in ten months, as policymakers try to support the world’s second-largest economy’s sluggish recovery.

Recent economic data indicated that the factory and retail sectors were having difficulty maintaining the momentum seen in the first quarter, prompting concerns that China’s post-COVID recovery could stall this year and could lead to major job losses.

Last week, the People’s Bank of China (PBOC) cut its short- and medium-term policy rates, sending a message that it is prepared to start a new wave of monetary easing in an effort to speed up the recovery.

All of the 32 market analysts who took part in the survey expected reductions to the one-year loan prime rate (LPR) and the five-year tenor.

Twenty-one respondents, or roughly 66% of the total, predicted that the one-year LPR, which is the basis for the majority of new and ongoing loans, will decrease by 10 basis points to 3.55% from 3.65%. Others predicted that the cut would be between 5 and 15 bps.

The five-year LPR, which serves as the mortgage reference rate, is expected to be further reduced by at least 15 basis points to boost home demand and support the real estate market, according to 16, or half, of the analysts and traders questioned by Reuters. Another 14 respondents anticipated that the present five-year tenor of 4.3% would be decreased by 10 bps to 4.2% in the future.

Chinese LPRs were last reduced on August 2022.

David Chao, global market strategist for Asia Pacific at Invesco said, “Traditionally, cuts to the medium-term lending facility (MLF) and open market operations (OMO) rates mean that we can expect a similar sized cut to the bank prime loan rate relatively soon. However, the biggest risk is that rate cuts can be ineffective when households and businesses are excessively conservative, busy deleveraging and paying off debt.”

China’s cabinet convened on Friday to examine ways to boost economic growth and made a commitment to provide greater policy support.

Despite widespread agreement that the LPR would be reduced on Tuesday, market participants have differing opinions on how much will be decreased. Some predict that the mortgage reference rate may be reduced further to help the struggling real estate market.

Following May statistics that indicated the post-COVID recovery was stalling, several major international investment banks lowered their projections for China’s GDP growth in 2023.

After 18 selected commercial banks submit recommended rates to the central bank each month, the LPR typically charged to banks’ best clientele is computed.

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