Investors Disappointed as China Makes ‘Underwhelming’ Decision to Cut LPR Key Interest Rate

Headline: China’s Decision Not to Cut Crucial Interest Rate Shocks Investors, Puts Real Estate Sector Recovery in Jeopardy

Subheading: The People’s Bank of China Holds Five-Year Loan Prime Rate Steady, Trims One-Year Rate

In an unexpected move, the People’s Bank of China (PBOC) has decided not to lower its five-year loan prime rate (LPR), currently at 4.2%. This move is expected to make it more difficult to restore investor confidence in the country’s ailing real estate sector – a sector that has significantly impacted the world’s second-largest economy.

While the PBOC trimmed its one-year loan prime rate by 10 basis points from 3.55% to 3.45%, it kept the five-year LPR on hold. This decision came as a shock to investors as most analysts had predicted a reduction in the five-year rate, which serves as the mortgage reference rate, by at least 15 basis points.

Subheading: A Disappointing Outcome for Investors

Describing the outcome as “underwhelming”, Julian Evans-Pritchard and Zichun Huang of Capital Economics noted that the latest round of cuts is insufficient to make a significant impact. They added, “this strengthens our view that the PBOC is unlikely to embrace the much larger rates cuts that would be required to revive credit demand.”

The LPR, which sets the interest that commercial banks charge their best clients, serves as the benchmark for household and corporate lending. While the one-year rate affects most new and outstanding loans, the five-year rate influences the pricing of longer-term loans, including mortgages.

Subheading: Impact on Chinese Markets

News of the PBOC’s decision led to a weakening of stocks in Hong Kong and mainland China, as well as the Chinese currency. Hong Kong’s Hang Seng traded 1.5% lower, falling deeper into a bear market, while the Shanghai Composite was down 0.5%.

Subheading: China’s Economic Challenges

China’s economic recovery has been described as undergoing a “zigzag” process. On top of a crisis in the property sector, the country is battling deflation, weaker exports, and record unemployment among younger people. Economists had expected cuts to the loan prime rate after China made a surprise slash to another rate, its medium term lending facility (MLF), last week.

Subheading: Downgrading of China’s Economic Forecast

UBS downgraded its economic forecast for the country, saying it now expects growth of 4.8% for 2023 and 4.2% for 2024. This is in contrast to the previous projections of 5.2% and 5%, respectively. The downgrade was made “in light of a deeper and longer property downturn and weakening global demand,” according to China economist Tao Wang.

Subheading: A Troubled Real Estate Sector

Investors have been worried about the multibillion-dollar debt load of one of China’s top property developers, Country Garden, which has missed some payments and suspended trading of onshore bonds, contributing to fears of a default. Reviving demand would take much larger rate cuts or regulatory measures to effectively restore confidence in the housing market.

Original Story at www.cnn.com – 2023-08-21 06:20:00