China cuts benchmark rates to strengthen its flagging economy

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Beijing — China’s central bank has intervened to lower benchmark lending rates and help slow the economy. Real estate market downturn During a year of political importance to leaders Xi Jinping..

The People’s Bank of China announced on Thursday that it has lowered the prime rate for 5-year loans, which is the benchmark for medium- to long-term loans, including mortgages, from 4.65% to 4.60%. This is the first reduction since April 2020. We also lowered the prime rate for one-year loans by 10 basis points to 3.70%. This is the second reduction to that rate over the months.

After the central bank lowered interest rates on its one-year medium-term lending facility by 10 basis points to 2.85% on Monday, analysts and traders widely expected the move, with Beijing taking a looser policy stance as economic clouds gathered. Emphasized the transition.

“China’s mitigation cycle is in full swing,” said Siana Yue, an economist at Singapore-based Capital Economics, in a note on Thursday. Yue predicts that central banks will continue to cut interest rates over the next few months, which will help support housing demand.

China recorded a sharp slowdown in the third quarter as the pandemic rebound diminished. Beijing is currently tackling long-term issues such as household debt and energy consumption. Anna Hirtenstein of the WSJ explains what investors are paying attention to. Photo: Long Wei / Sipa Asia / Zuma Press

The move to push down borrowing costs follows a number of economic data released by China on Monday, stating that domestic consumption was hit by a new Covid-19 outbreak, slowing growth in the last few months of last year. is showing. National real estate sector turmoil I made my emotions heavy.

Since 2021, when Beijing has unleashed a series of regulatory crackdowns on the technology, private education and real estate sectors, Chinese leaders have been Stability is our top priority in 2022..

The outlook for slowing and volatile growth in the real estate market (a sector that in a sense accounts for about one-fifth of China’s economy) will ruin the political mood ahead of the up-and-coming Communist Party meeting later this year. There is a risk. .Xi is expected to break recent precedents and seek a third phase of power.

On Sunday, China’s Supreme Law Enforcement Agency issued a rare warning about the political consequences of a domestic economic downturn, warning that “a deep-seated problem could surface as the recession goes.”

“If economic and financial risks are mishandled, they can easily be transmitted to the social and political spheres,” said the Central Political and Legal Commission of the Communist Party, which oversees national police, prosecutors and courts. Read the commentary published by.

Last month, the Communist Party’s highest decision-making body, the Politburo, worshiped stability as the “top priority” of the Chinese economy in 2022 at a meeting chaired by Mr. Nishi.

People’s Bank of China Deputy Governor Liu Guoqiang said Tuesday that the central bank will act earlier and more strongly to stabilize this year’s economy, leading financial institutions to expand credit issuance using a variety of tools. .. To ensure sufficient market liquidity.

The central bank is based on monthly benchmark lending rates, based on estimates from the country’s major lenders. The bank then uses the loan prime rate as a reference to set the price of the new loan. Since the introduction of the new benchmark in 2019, Chinese banks have gradually replaced existing loans with loans based on the new rate regime.

China’s economy expanded 8.1% last year. However, in the fourth quarter, Gross domestic product increased by only 4% From the same period last year — the slowest pace since the Covid-19 recovery began in the second quarter of 2020.

China’s premier economic planning agency, the National Development and Reform Commission, said on Tuesday that Beijing is pushing ahead with major infrastructure projects to combat uncertainty earlier this year in the face of downward economic pressure. Said to.

While rate cuts over the past two months are welcomed by some economists, the scope is still fairly modest compared to the magnitude of the problems facing the economy.

In particular, the five-basis point reduction in the five-year loan prime rate was smaller than expected. Citigroup economists said it may reflect that regulators are hesitant to bail out the real estate sector more stimulatingly. Last year, the government began to enforce more stringent borrowing restrictions on over-expanded developers, fearing excessive leverage in the real estate market. Homebuilder on the brink of default..

Investment bank Nomura economists are concerned about rising economic and social costs for China’s zero-tolerance Covid containment strategy, as well as a slump in the real estate market and slowing export growth. They say a much more aggressive easing policy is needed to get the recovery on track.

As it is, China’s central bank easing bias is in the direction of the Federal Reserve and other developed central bank policies that are preparing to mitigate the stimulus of the pandemic era to curb high inflation. In contrast to sex.

Write in Jonathan Chen jonathan.cheng@wsj.com

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China cuts benchmark rates to strengthen its flagging economy

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