China cut two benchmark lending rates for the first time in nearly a year, as policymakers pushed ahead with cautious monetary support to spur stronger growth in the country’s struggling economy.
The PBOC said on Tuesday that the one-year loan prime rate (LPR) was cut by 10 basis points to 3.55%, while the five-year equivalent rate was lowered to 4.2% from 4.3%.
The rates, which are set by major banks and affect borrowing costs for businesses and households, point to recent efforts by authorities to shift the policy framework toward accommodative amid growing concerns about the trajectory of the world’s second-largest economy.
China’s economy has failed to fully rebound six months after authorities lifted strict Covid-19 restrictions imposed for three years, with growth weighed on by trade headwinds and weakness in the property sector, which accounted for more than a quarter of activity.
Last week, the People’s Bank of China cut the country’s medium-term lending facility, affecting liquidity in the banking sector, while Beijing unveiled additional tax incentives for companies. Economists generally expect more support measures to be rolled out in the coming months.
China’s benchmark CSI 300 index was flat after the LPR announcement, while the Hang Seng China Enterprises Index of Hong Kong-listed mainland companies fell 1.9%. Shares of real estate developers led losses after the five-year rate was cut by just 10 basis points, underscoring the market’s sensitivity to the prospect of further property stimulus.
“The market is expecting a high (0.15 percentage point) for the five-year LPR as it is linked to mortgages and will help boost the housing market,” said Marcella Chow, global market strategist at JPMorgan Asset Management. “The important thing now is to boost confidence, so a better macro outlook and stronger property prices are key.”
Disappointing economic data in the months since China reopened has fueled speculation about whether policymakers will remain cautious or switch to stronger stimulus to boost demand.
Over the weekend, analysts at Goldman Sachs cut their forecast for China’s full-year economic growth to 5.4% from 6%, citing “persistent growth headwinds and limited policy response”. The government’s official growth target is 5%, the lowest level in decades, after the economy grew by just 3% last year.
Economists at Citi wrote in a report on LPR cuts that “decisive support is necessary to avoid a confidence trap and keep growth on track,” adding that they “continue to see moderate real estate-focused The stimulus package is reasonable and possible” .
Other economic indicators point to continued pressure on confidence. Consumer confidence weakened further, with only about a third of respondents saying they planned to spend more in the next six months, compared with more than 40% in April, according to Bank of America’s June survey results released on Tuesday.
The proportion of respondents expecting house prices to rise in the next year fell to one in five, down from one in three two months ago.