Call it a token gesture.
China’s de facto benchmark lending rate fell for the first time in 20 months, the PBoC said Monday. The decline was a scant five basis points (figure below).
The move, which I’d suggest was more symbolic than anything else, came two weeks after the PBoC cut RRR for the second time in six months.
The five-year loan prime rate was left unchanged, likely due to lingering concerns about froth in the property sector.
Expectations for broad-based easing from China waxed and waned over the course of 2021. An RRR cut in July revived expectations for a pivot, but Beijing was keen to perpetuate the notion that unlike its counterparts in developed economies, the PBoC wouldn’t resort to overt monetary largesse or otherwise “flood” the economy with stimulus.
By October, though, the cumulative effect of Xi’s multi-faceted regulatory crackdown, the Party’s “zero COVID” strategy, an acute power crunch and Beijing’s property curbs was too much for analysts to ignore. Growth expectations crumbled and sentiment deteriorated meaningfully.
Chinese officials did manage to keep Evergrande’s slow motion default from triggering a systemic crisis, and although Kaisa and other developers are beset, a controlled demolition seems more likely than a catastrophic implosion.
Signs of stability and robust exports notwithstanding, activity data for November was weak and exactly no one is under the impression that growth is poised to inflect meaningfully for the better anytime soon.
The RRR cut on December 6 and news that the PBoC also lowered the relending rate for SMEs, served to underscore the notion that China has embarked on an easing cycle, even if officials avoid branding it as such.
Monday’s one-year loan prime rate cut should be viewed in that context — one more nod to the myriad headwinds facing the world’s second-largest economy. Although not dramatic by any stretch, it’s the thought that counts, as they say. Apparently, the move will reduce interest burdens by some CNY80 billion per year beginning in 2022.
Notably, the reduction came despite no change in the MLF rate this month. LPR is priced off MLF. So, it would appear the reduction was solely (or mostly) a reflection of banks lowering borrowing costs of their own accord, helped along by the RRR cuts. That, as opposed to the PBoC guiding the rate lower with an MLF cut ahead of time.
