The People’s Bank of China (BPC, central bank) has announced this Monday that it will lower its reference rate for loans by ten basis points, from 3.55% to 3.45%, thus undertaking the second reduction this year before concerns about a less lustrous than expected economic recovery. The reference rate for credits (LPR, acronym in English) to one year had registered its last variation last June, when the central bank cut it from 3.65%.
This indicator, established as a reference for interest rates in 2019, is used to set the price of new loans -generally, for companies- and variable interest loans that are pending repayment. Its calculation is carried out based on the contributions to the prices of a series of banks -including small lenders that tend to have higher financing costs and greater exposure to non-performing loans-, and its objective is to lower the costs of borrowing and support the “real economy”.
However, the LPR for five years or more -the reference for mortgage loans- did not change, remaining at 4.2%. The decision announced today is less aggressive than expected by analysts, who anticipated a drop of 15 basis points for both the one-year LPR and the five-year LPR.
Analysts call the central bank’s move “disappointing”
Julian Evans-Pritchard and Zichun Huang of Capital Economics gave term (MLF), the PBOC’s main tool for financing banks and generally guidance for LPRs.
“The disappointing LPR announcement reinforces our view that the PBOC is unlikely to take the much larger rate cuts that would be needed to revive credit demand,” the experts explained, adding that hopes for a rebound based on stimulus now hinges on the possibility of further fiscal support.
“Wish to boost economic activity”
“This suggests that the PBOC is trying to balance its desire to boost economic activity and the concerns of banks, which are changing due to lower interest margins and their lower ability to generate profits,” said Evans-Pritchar d and Huang, who expect another 20 basis points of rate cuts throughout the remainder of 2023.
After a promising start to the year, the post-pandemic recovery of the Chinese economy is showing signs of slowing down, growing less than expected in the second quarter (+6.3% year-on-year). Low national and international demand, risks of deflation and insufficient stimuli, together with a real estate crisis that has not bottomed out and a lack of confidence within the private sector are the main causes that analysts use to explain the problems of the second largest world economy.
