China’s rate cuts set to boost economic recovery: Experts

China's over-five-year loan prime rate dropped to 4.3 per cent in August, marking the lowest level since the rate debuted in Aug 2019.


A resident in Guangzhou checks the model of a building before purchasing an apartment. [Photo provided to China Daily]

August 23, 2022

BEIJING – The reduction in China’s benchmark lending rates on Monday will boost the nation’s economic recovery by spurring corporate and household spending and stabilizing the real estate sector, experts said.

China’s over-five-year loan prime rate — a key market-driven pricing reference for home mortgages, also known as the LPR — dropped to 4.3 percent in August from 4.45 percent in July and marking the lowest level since the rate debuted in August 2019, the National Interbank Funding Center said on Monday.

The one-year LPR — the benchmark lending rate mainly for short-term loans to companies — also decreased on Monday, to 3.65 percent from 3.7 percent a month earlier, the center said.

“The reductions will play a positive role in reducing financing costs for the real economy, improving the confidence of market players and promoting the recovery of credit demand,” said Wen Bin, chief economist at China Minsheng Bank.

The marked reduction in the over-five-year LPR will help the real estate sector stabilize by unleashing housing demand and boost consumer spending by reducing household debt burdens, he said.

Meanwhile, the lowered one-year LPR will further bring down companies’ financing costs and improve their overall outlook in terms of business prospects, and drive up the country’s growth in fixed-asset investment, Wen said.

The rate decreases were greeted by China’s stock market on Monday, with the benchmark Shanghai Composite Index rising 0.61 percent to close at 3,277.79 points.

Monday’s move came after the People’s Bank of China delivered a surprise cut in the interest rate of the medium-term lending facility — a key reference of LPRs — which underlined the central bank’s focus on the stabilization of growth on Aug 15.

An executive meeting of the State Council, China’s Cabinet, on Thursday called for efforts to lower the financing burdens on businesses and consumption credit costs for individuals in order to ramp up financial support for the real economy.

As a result of Monday’s move, the total decline in the over-five-year LPR so far this year has reached 35 basis points, following reductions in May and January.

Wu Chaoming, deputy director of the Chasing International Economic Institute, said more reductions in the over-five-year LPR are possible if the real estate sector recovers at a sluggish pace.

Wu added that Monday’s one-year LPR reduction was modest because short-term funding costs have been relatively low while the country needs to coordinate the goal of supporting the economy with maintaining the stability of its currency and the level of inflation.

The central parity rate of the yuan against the dollar weakened by 133 basis points to 6.8198 on Monday, the weakest level in nearly two years, according to market tracker Wind Info.

Yan Yuejin, director of the E-house China Research and Development Institution, said Monday’s cut could save about 90 yuan ($13.16) in monthly payments for a homebuyer who takes out a 30-year mortgage with a principal of 1 million yuan, with those with existing mortgages seeing reductions in their payments starting next year.

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