In a move largely in line with market expectations, the People's Bank of China, the central bank, announced cuts on the benchmark lending rate of loan prime rates on Jan 20, which analysts and experts said will help lower overall financing costs and bring a dose of positive news to the property market.
The one-year LPR is cut by 10 basis points from last month's fixing to 3.7 percent, said the latest statement from the PBOC. The five-year LPR is trimmed by 5 basis points to 4.6 percent, the first time the rate has been reduced since April 2020.
Wen Bin, chief analyst at China Minsheng Bank, said the latest LPR cuts are largely along the lines of market expectations, as the PBOC had announced on Jan 17 the cut in the medium-term lending facility — a key policy rate — by 10 basis points to 2.85 percent.
The LPR quotation is now determined by the MLF with certain differences. Therefore, the lowered MLF will lead to a drop in LPR quotations, which in turn will lower the comprehensive financing cost in the real economy. The lowered five-year LPR will help reduce mid to long-term financing costs for the manufacturing industry and mortgages, Wen said.
Liu Guoqiang, deputy governor of the PBOC, explained that banks will refer to the five-year LPR when they offer mid to long-term loans for the manufacturing industry, fixed asset investment loans, or personal mortgages.
He also said on Jan 18 at a news conference held by the State Council, China's Cabinet, that there should be more stabilizing policies introduced this year to address the latent downward pressure regarding the country's economic growth.
Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institution, said the recent cut in the five-year LPR bears much resemblance to the prior reduction in April 2020, when the country's economy was hit hard by the COVID-19 pandemic.
Taking the 30-year 1-million-yuan ($157,637) fully amortized mortgage as an example, the monthly payment should be 5,156 yuan when the LPR was set at 4.65 percent. As the LPR is now lowered to 4.6 percent, the monthly payment will be reduced to 5,126 yuan, Yan said.
Since the LPR cut has been implemented at the beginning of the year, it can be inferred that increasing liquidity, lowering financing costs and stabilizing economic growth will be the focus of this year's monetary policies, he added.
Huang Wentao, chief economist of China Securities, said that market liquidity will be limited, as special bonds will be released by the end of the first quarter and people tend to be more cash-conservative around the Lunar New Year.
Based on past experiences, the reserve requirement ratio will be lowered in succession to the MLF and LPR cuts to further release liquidity into the market, Huang said.
Market reaction was subdued. The benchmark Shanghai Composite Index eased 0.09 percent to close at 3555.06 points on Jan 20 while the Shenzhen Component Index shed 0.06 percent to finish at 14198.3 points.
Analysts from Guotai Junan Securities said it is too early to see the influence of lowered interest rates on the stock market.
More stabilizing policies and growth incentives should be introduced to buoy the A-share market. The bond market, on the other hand, is worth looking at in the short term as China's inflation has contracted and the credit environment remains relaxed, they said.
