China cuts benchmark lending rates as policy easing picks up

China has cut benchmark lending rates for the first time in almost a year as policymakers push ahead with cautious monetary support in an effort to spur more robust growth in the country’s struggling economy.

The one-year loan prime rate (LPR) was reduced by 10 basis points to 3.55 per cent, the People’s Bank of China said on Tuesday, while the five-year equivalent rate was lowered to 4.2 per cent from 4.3 per cent.

The rates, which are set by major banks and influence the cost of borrowing for businesses and households, indicate authorities’ latest effort to shift the policy framework towards easing as concern mounts over the trajectory of the world’s second-biggest economy.

China’s economy has failed to fully rebound six months after authorities unwound severe Covid-19 restrictions that had been in place for three years, with growth under pressure from trade headwinds and weakness in the property sector, which accounts for more than a quarter of activity.

Last week, the PBoC cut the country’s medium-term lending facility, which affects banking sector liquidity, while Beijing unveiled additional tax breaks for businesses. Economists widely anticipate additional supportive measures to be rolled out in the coming months.

China’s benchmark CSI 300 stock index was flat following the LPR announcement, while the Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 1.9 per cent. Shares in property developers led losses after the five-year rate was cut by just 10 basis points.

“The market was expecting up to [0.15 percentage points] on the five-year LPR, since it’s linked to mortgages and would help to boost the property market,” said Marcella Chow, a global market strategist at JPMorgan Asset Management. “The important thing right now is to boost confidence, so a better macro outlook and stronger property prices are key.”

Economic data has disappointed in the months following China’s reopening, fuelling speculation over whether policymakers would remain cautious or pivot to more forceful stimulus measures to boost demand.

Over the weekend, analysts at Goldman Sachs cut their forecast for China’s full-year economic growth to 5.4 per cent from 6 per cent, citing “persistent growth headwinds and constrained policy responses”. The government’s official growth target is 5 per cent, its lowest in decades, after the economy grew just 3 per cent last year.

Economists at Citi wrote in a report on the LPR cuts that “decisive support is necessary to avoid a confidence trap and keep growth on track”, adding that they “continue to see a measured stimulus package with a focus on property as both plausible and possible”.

Other economic indicators pointed to sustained pressures on confidence. The results of a June survey released on Tuesday by Bank of America showed consumer sentiment had weakened further, with only about a third of respondents saying they planned to spend more over the next six months, compared with more than 40 per cent in April.

The share of respondents expecting home prices to rise over the next year fell to just one in five, compared with one in three two months prior.