China is likely to cut borrowing costs further as its measured pace of easing has yet to revive bank lending and economic growth, analysts said.
The People’s Bank of China is expected to cut benchmark interest rates by another 15 basis points before mid-year after cutting the prime one-year and five-year loan rates, or LPRs, on January 20 from 10 basis points and 5 basis points, respectively, UOB wrote the analysts in a note on the day. Another 50 basis point cut in the reserve requirement ratio, or RRR, for banks is also likely on the table, following the 50 basis point cut in the RRR in December 2021, the note said.
“The magnitude of the rate cut is simply too small to have a meaningful impact,” Nomura analysts wrote in a Jan. 20 note. The brokerage also expects the central bank to cut LPRs again before mid-2022.
Loan demand in China has been hit by a wave of defaults among property developers and pandemic-related business disruptions. Banks have also been reluctant to lend more aggressively due to concerns over bad debts.
Bank lending growth continued to slow after Beijing introduced measures to free up more liquidity in late 2021. New yuan lending in December 2021 contracted 9.7% year-on-year and down 20.5% from the previous month, according to the People’s Bank of China, or PBOC.
The outstanding loans of Chinese financial institutions increased by 11.37% in November 2021 compared to the previous year, according to the China Banking and Insurance Regulatory Commission. The growth rate was the lowest since March 2006.
As growth in the world’s second-largest economy has slowed since the third quarter of 2021, Beijing has stepped up its easing efforts. In addition to the two LPR cuts and one RRR cut, the central bank cut medium-term lending facility lending and reverse repos on January 17 by 10 basis points.
“They’re fine-tuning [rates] very carefully, just to make sure the easing policy targets those who need it rather than areas that could lead to speculation,” said Song Seng Wun, an economist at CIMB Private Banking. “They don’t want the fire [of the property boom] come back because it would destroy everything.”
China’s central bank has additional leeway to cut rates as inflation expectations remain well anchored, Song said.
China’s CPI rose 1.5% in December 2021 from 2.3% the previous month due to lower food prices.
Real estate pressure
China’s real estate sector has come under close scrutiny following debt problems at top developer China Evergrande Group. While the impact on banks was limited, market sentiment may have had an impact on liquidity within the sector and on homebuyers, analysts said.
“Refinancing is the biggest concern facing developers as reports of increased liquidity issues and construction and delivery delays undermine buyer confidence. Much will depend on regulatory development,” said Nathan Chow, Senior Economist at DBS Hong Kong.
The central bank last cut the one-year LPR by 5 basis points a month ago, which was the first since April 2020, but kept the five-year rate, on which most mortgages are based, unchanged.
“The LPR’s cut to five years suggests some easing in the official stance on the housing market, but the lower cut still indicates that the PBOC is keen to target business support rather than fueling a housing market rebound. “, said the UOB. note says.