China keeps cutting critical lending rates to shore up its economy

By Laura He, CNN Business

China keeps slashing lending rates as authorities ramp up their efforts to stave off a sharp economic slowdown.

The People’s Bank of China on Thursday cut its one-year loan prime rate by 10 basis points to 3.7%, the second cut to the rate in a month. December’s cut was the first time the central bank touched the benchmark lending rate since April 2020, when China was in the throes of the initial coronavirus outbreak.

The central bank also trimmed its five-year loan prime rate by five basis points to 4.6%, the first cut to that rate since April 2020.

China’s loan prime rate is the rate at which commercial banks lend to their best customers, and it serves as the benchmark rate for other loans. The one-year maturity influences new and outstanding loans that must be paid back in a shorter time frame. The five-year one, meanwhile, usually serves as a reference for mortgages.

The central bank’s decision to cut both rates is the latest in a series of steps that China has taken to loosen monetary policy, as authorities contend with a deepening slump in the real estate market and slowing economic growth.

China’s GDP expanded 8.1% in 2021, according to government figures published earlier this week, but the pace slumped in the final quarter. Analysts expect the country could struggle even more this year, as the world’s second largest economy tries to stave off coronavirus outbreaks with its strict zero-Covid policy, and as the property crisis continues to fester.

Even Chinese President Xi Jinping — not normally one to remark publicly on economic policy — called on Western central banks earlier this week to avoid hiking interest rates too fast to fight inflation, as his country’s policies head in the opposite direction.

Before Thursday, China’s central bank had already been adjusting policy. It reduced an important lending rate to financial institutions earlier this week. And along with its cut to the loan prime rate last month, the central bank also slashed the reserve requirement ratio, which determines how much cash banks must hold in reserve.

Hong Kong’s Hang Seng Index pulled higher on Thursday following the Chinese central bank’s rate cuts. It jumped more than 2% by noon local time, with tech and property stocks staging a sharp rally. Mainland China’s Shanghai Composite also edged higher. Japan’s Nikkei and Korea’s Kospi rose 1% and 0.5%, respectively.

China’s easing cycle is “in full swing,” wrote Sheana Yue, China economist for Capital Economics, in a note published Thursday.

“Today’s cut will immediately feed through to outstanding floating rate business loans and should also lead to cheaper loans for new fixed rate borrowers,” she said, noting that mortgages would be “slightly cheaper,” which should help shore up housing demand.

“We expect additional easing measures to follow in the coming months,” Yue wrote, adding that it’s possible the central bank could make even further cuts to the one-year loan prime rate.

Averting a collapse of China’s real estate sector is of particular concern in China. The industry crunch began more than a year ago when Beijing started cracking down on excessive borrowing by developers — a move intended to rein in their high leverage and curb runaway housing prices.

But the problem escalated significantly last fall as Evergrande — China’s most indebted developer with some $300 billion in liabilities — began warning more urgently of liquidity problems.

Analysts have long been concerned that a collapse could trigger wider risks for China’s property market, hurting homeowners and the broader financial system.

Even so, the latest measures are “not sufficient to boost the economy,” according to analysts at Nomura.

“In our view, the real drags on China’s economy are the rising costs of China’s zero-Covid strategy to contain waves of coronavirus, slowing export growth and the worsening property sector,” they wrote in a Thursday report. The no-tolerance strategy to containing the coronavirus has resulted in stringent lockdowns and severe isolation.

Policymakers face other constraints, too, such as a significant amount of hidden debt held by local governments, the analysts wrote. If credit is allowed to expand too much, that could lead local governments to borrow even more, exacerbating their debt problems.

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