China economy

Chinese economy: LPR reduced for the first time in 20 months

By Hal J. Turner
The People’s Bank of China on Monday cut its one-year lending prime rate (LPR) by 5 basis points to 3.8%. the The LPR is the rate at which commercial banks lend to their best customers and it serves as a reference rate for other loans.
While Monday’s rate cut is small, it’s the first such move since April 2020, when China cut the rate to boost its Covid-hit economy, which had correct contracted for the first time in more than 40 years.

“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” Zhaopeng Xing, senior China strategist at ANZ, said Monday. in a research note.

A lower lending rate can help reduce borrowing costs for households and businesses and thereby encourage consumers to expenses and investments.

Unlike the West, Beijing has refrained from flooding the economy with stimulus packages during the pandemic, instead focusing on offering targeted support to small businesses.

China was the only major economy to register growth in 2020, but this year the country’s expansion has been hit by several factors, forcing it to consider ways to provide support even as other major banks central governments are withdrawing stimulus and raising interest rates to fight inflation.

A power shortage has hampered industrial production for much of this year as the country struggles to balance its electricity needs with efforts to tackle the climate crisis.
Government data last week showed house prices fell for a third consecutive month in November, a sign that the ongoing housing crisis continues to deepen.
Retail sales have also struggled, suggesting the coronavirus outbreaks and the government’s “zero-Covid” approach of locking down areas where infections flare up are weighing heavily on the economy.
China’s top leaders have already expressed concerns about growth prospects. At a key economic meeting earlier this month, they said “securing stability” would be a top priority for the year ahead. It’s a huge pivot from last year’s meeting, when “limiting the disorderly expansion of capital” dominated the day.

To counter rising economic risks, policymakers pledged at this year’s meeting to implement “front load” policies, including keeping monetary policy “flexible”.

Last week, the central bank lowered the reserve requirement ratio for most banks by half a percentage point. The move, which reduces the amount of money banks must keep in reserve, is expected to free up some 1.2 trillion yuan ($188 billion) for lending to businesses and households, according to the PBOC.

China injects 188 billion dollars into the economy to counter the real estate crisis

Monday’s LPR cut is expected to reduce “interest burden” by about 80 billion yuan ($12.6 billion) a year, starting next year, for businesses and households, it said. Xing from ANZ.

“The PBOC wants to provide more easing because it is more concerned with economic dynamics,” Societe Generale analysts said in a research note on Monday.

“There should be no doubt now that a serious (although still limited) easing cycle is unfolding.”

Economists say the world’s second-largest economy could grow next year at its slowest pace since 1990.

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Hal J. Turner
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