China cut its benchmark lending rate and mortgage reference by a bigger amount on Monday. This is in addition to the measures Beijing took last week to make it easier for people to borrow money. Beijing is trying to boost an economy that has been hurt by a property crisis and a rise in COVID cases.
The People's Bank of China (PBOC) is trying to get growth going again, but it has to walk a tightrope.
Too much stimulus could make inflation worse and cause money to leave the country at a time when the Federal Reserve and other economies are raising interest rates quickly.
But low credit demand is making it hard for the PBOC to keep China's economy on a steady course.
At the central bank's monthly fixing, the one-year loan prime rate (LPR) was cut by 5 basis points to 3.65%, and the five-year LPR was cut by 15 basis points to 4.30.
The last time the one-year LPR went down was in January. The last time the five-year tenor went down was in May. It affects the price of home mortgages.
Sheana Yue, a China economist at Capital Economics, said that all of the PBOC's recent announcements give the impression that policy is getting easier, but not in a big way.
"We expect the PBOC policy rates to go down by 10 bps twice more by the end of the year, and we still think the reserve requirement ratio (RRR) will go down next quarter."
The PBOC surprised the markets last week by lowering the rate for the medium-term lending facility (MLF) and another short-term liquidity tool. This was done because recent data showed that the economy was losing momentum because global growth was slowing and borrowing costs were going up.
In a poll done by Reuters last week, 25 of the 30 people who answered said that the one-year LPR would go down by 10 basis points.
All of the people polled also thought that the five-year tenor would go down, and 90% of them thought it would go down by more than 10 bps.
Worries that China's policies are becoming more different from those of other major economies pushed the Chinese yuan to levels not seen in almost two years. The last price of the onshore yuan against the dollar was 6.8232.
LOSS OF MOMENTUM
China's economy, which is the second largest in the world, almost shrank in the second quarter because widespread lockdowns and a real estate crisis hurt consumer and business confidence.
Beijing's strict "zero-COVID" strategy still hurts consumption, and cases have started to rise again in the last few weeks.
A slowdown in global growth and problems with the supply chain are making things even worse. This makes it less likely that China will have a strong comeback.
A lot of data that came out last week showed that the economy slowed down unexpectedly in July. This caused some global investment banks, like Goldman Sachs and Nomura, to lower their predictions for China's GDP growth for the whole year.
Goldman Sachs cut its prediction for China's GDP growth for the whole year of 2022 from 3.3% to 3%, which is much lower than Beijing's goal of around 5.5%. In a recent high-profile policy meeting, the government didn't talk about the difficulty of meeting the GDP goal. This was a sign that they knew it would be hard.
"The LPR cuts were what we expected," said Marco Sun, the chief financial market analyst at MUFG Bank.
The 15-bps cut to the 5-year LPR was meant to increase demand for long-term financing. The deeper cut to the mortgage reference rate shows that policymakers are trying to stabilize the sector after a string of defaults by developers and a drop in home sales hurt consumer demand.
Sources told Reuters last week that China will support the sector, which makes up a quarter of the national GDP, by backing new onshore bond issues by a few private developers.
The LPR cut was necessary, but Xing Zhaopeng, a senior China strategist at ANZ, said that the size of the cut wasn't enough to boost financing demand.
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