Friday, 29 September 2023

As the Economy Weakens, China may Lower Important Lending Standards

According to a Reuters survey, China is anticipated to lower important lending standards on Tuesday, marking the first reduction in ten months. There are worries that China’s post-COVID recovery will slow this year and result in significant employment losses as the industry and retail sectors are failing to sustain momentum.

Last week, the People‘s Bank of China (PBOC) reduced its short- and medium-term policy rates, sending a message that it is prepared to start another round of monetary policy easing to speed up the recovery.

Important Lending Standards

A survey of 32 market observers found that both the five-year tenor and the one-year loan prime rate (LPR) will decrease. Nearly 66% of those surveyed anticipated a 10 basis point reduction in the one-year LPR, from 3.65% to 3.55%, while others predicted a reduction of five to fifteen basis points (bps).

To boost home demand and the real estate market, 16% of analysts and traders polled by Reuters predicted that the five-year LPR, which serves as the mortgage reference rate, will be further reduced by at least 15 basis points.

  • China to lower lending standards, fearing slow recovery, and employment losses.
  • Market observers predict a 10-bps reduction in one-year LPR.
  • China’s cabinet considers focused fiscal and economic measures.

Another 14 respondents anticipated that the present five-year tenor of 4.3% would be decreased by 10 bps to 4.2% in the future. Chinese LPRs were last reduced on August 2022.

David Chao, a global market strategist, anticipates that governments will offer more focused fiscal and economic measures. China’s cabinet convened on Friday to examine ways to boost economic growth and committed to providing greater policy support.

Market participants are split on the magnitude of the cuts, with some anticipating a deeper decrease in the mortgage reference rate to help the struggling real estate market. An unbalanced cut of five basis points in one-year LPR and 15 bps in five-year LPR is what Citi analysts are anticipating.

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