Troubled Chinese economy gets stimulus as banks cut lending rates

As part of a range of strategies focused on revitalizing economic growth and preventing a decline in the housing market, China has lowered its benchmark lending rates following the People's Bank of China’s decision to cut interest rates at the end of September.

As per reports, the one-year loan prime rate (LPR) has been lowered by 25 basis points to 3.10%, a decrease from the previous rate of 3.35%. Similarly, the five-year LPR has been cut by 25 basis points to 3.60%, down from 3.85%.

The size of the cut is at the upper bound of the 20-25 basis points range forecast by PBOC Governor Pan Gongsheng in speeches since late September, and bigger than the 20 basis point reduction projected by all 17 economists, say reports.

The reductions to the LPR are set by a consortium of big Chinese banks, and has come after the PBOC laid out steps last month to stimulate households and companies to borrow money. The measures include lowering interest rates and unlocking liquidity to enc ourage bank lending.

According to Beckly Liu, head of China macro strategy at Standard Chartered Plc, the larger cuts confirm the PBOC’s stance of easing monetary policy more quickly, and echo the politburo’s statement of cutting rates more forcefully.

During a September Politburo meeting, China's top leaders emphasized the need for significant interest rate reductions and initiatives to prevent further decline in the property market, marking their strongest commitment to stabilizing this vital sector.

Bruce Pang, Chief Economist for Greater China at Jones Lang LaSalle Inc., believes the larger-than-expected LPR cuts are meant to contribute to the stabilization of the property market.

The PBOC has hinted at the possibility of more easing measures. Pan mentioned that the central bank could reduce the reserve requirement ratio—thus enabling banks to lend more—by another 25 to 50 basis points by year’s end, depending on the liquidity conditions.

When it comes to interest rates, many believe the PBOC will postpone any further reductions until next year after the substantial cuts made recently.