Chinese banks kept a key interest rate that guides mortgages on hold and made a smaller-than-expected cut to another rate, surprise moves that reflect Beijing’s difficult choice between boosting confidence and safeguarding the banking system’s stability.
(Bloomberg) — Chinese banks kept a key interest rate that guides mortgages on hold and made a smaller-than-expected cut to another rate, surprise moves that reflect Beijing’s difficult choice between boosting confidence and safeguarding the banking system’s stability.
The five-year loan prime rate was left at 4.2% on Monday, according to data from the People’s Bank of China. Most economists had predicted the rate to be cut by 15 basis points following a similar reduction last week to an key central bank policy loan rate. That was seen as precursor for a cut to the 5-year LPR.
The one-year LPR was lowered by 10 basis points to 3.45% from 3.55%, a smaller cut than most economists predicted.
The moves highlight a dilemma facing Beijing as it seeks to boost borrowing by cutting interests rates while at the same time needing to preserve financial stability. Lower lending rates would reduce banks’ revenue and profitability, with the PBOC highlighting those risks in a report last week.
“Protecting banks’ net interest margins is the main motivation behind the smaller-than-expected cuts to LPR in our view,” Goldman Sachs Group Inc. economists including Maggie Wei wrote in a note. “Having said that, confidence remains key to an economic recovery, and the disappointing cut to LPR would not help with building confidence.”
Stocks in China and Hong Kong declined on Monday. A gauge of Chinese firms listed in Hong Kong fell as much as 1.9% to the lowest since November. The offshore yuan extended a modest decline against the dollar, weakening about 0.3%. China 10-year bond yields fell two basis points to 2.55%, the lowest since 2020.
The government has signaled more urgency in shoring up growth for the world’s second-largest economy as borrowing demand slumps, deflation pressures take hold and confidence struggles to recover. Investors are also concerned about contagion risks following a liquidity crisis at a major shadow bank.
The decision on the loan prime rates came as a surprise after last week’s shock cut to the PBOC’s medium-term lending facility rate, and a meeting days later between the central bank, financial regulators and bank executives, in which lenders were again told to boost loans.
That all culminated in expectations Monday that the loan prime rates would also be reduced. While the rates are determined by the banks, the PBOC has influence over the monthly setting. The rates are based on the interest rates that 18 banks offer their best customers, and they are quoted as a spread over the central bank’s one-year policy rate.
Some analysts said the hold in the five-year rate suggests Beijing may be planning more direct measures to support the property market.
What Bloomberg Economics Says …
“The surprise hold on China’s five-year loan prime rate conveys two messages. First, there may be doubts that slashing rates for new mortgage loans — which are already at a record low — is the best way to shore up the housing market. Second, it could be a signal that other — non-monetary — policy support is in the pipeline.”
— Eric Zhu, economist
Read the full report here.
Weak data recently has prompted prompting several banks to cut their growth forecasts for the year to below 5%, implying the government may miss a growth target set earlier this year. Citigroup Inc. economists on Monday trimmed their forecast to 4.7% from 5%, citing a slow policy roll-out, while UBS Group AG downgraded its forecast to 4.2%.
Chinese banks have faced narrower profit margins in recent years due to fiercer competition and a decline in lending rates since the pandemic, the PBOC said in a special section of its quarterly report published last week. Banks need to maintain “reasonable profits and net interest margins” so they can serve the real economy and prevent financial risks, the PBOC said.
Lenders may have also been constrained because average new mortgage rates are at record lows. The average fell to 4.11% in June, according to last week’s PBOC report. The PBOC is also guiding banks to lower the rates for existing mortgages, which will weigh on their margins.
Last year, the five-year LPR was cut by a total of 35 basis points — more than the 20-basis point reductions seen in the MLF rate, and deeper than the 15 basis points worth of trims to the one-year LPR.
“The lack of ability to lower the LPR rate, which is determined by banks, even with such a strong MLF rate cut suggest more measures to lower banks’ cost of liabilities will become more urgent,” said Becky Liu, head of China macro strategy at Standard Chartered Plc.
She sees the possibility of a cut to the reserve requirement ratio for banks, reduced deposit rates and trims to relending rates.
Monday’s actions also send a signal “that authorities don’t want the property market to overheat,” said Bruce Pang, chief economist and head of research for greater China at Jones Lang LaSalle Inc.
“There has been speculation on whether the government will completely let loose property policies after the Politburo meeting omitted the pledge that housing is not for speculation,” he said, referring to a meeting held last month by the Communist Party’s top decision-making body. The absence of that slogan, a signature of President Xi Jinping, fueled speculation that some tough restrictions on property would be reversed.
“The signal now is that there will still be policy controls on the property sector, just that they will be optimized,” Pang said, adding that authorities have also introduced a mechanism for lowering new mortgage rates already, lessening the need to adjust the five-year LPR.
–With assistance from Qizi Sun, Cormac Mullen, Tan Hwee Ann, Paul Dobson, April Ma, Tao Zhang and Tom Hancock.
(Updates with additional details.)
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