China has responded to its slowing economic growth, exacerbated by ongoing deflationary pressures, by reducing its benchmark lending rates by 25 basis points. On Monday, the People's Bank of China (PBoC) announced a reduction in the one-year loan prime rate (LPR) from 3.35 percent to 3.10 percent. Similarly, the five-year LPR, crucial for mortgage rates, was decreased from 3.85 percent to 3.60 percent. This follows a previous 10 basis points cut in July.
This decision was anticipated, as PBoC Governor Pan Gongsheng indicated last week that a cut between 0.2-0.25 percentage points was forthcoming. Governor Pan also suggested the potential for a further reduction in the reserve requirement ratio by 0.2-0.5 percentage points, conditional on market liquidity, by the end of the year.
The LPR, determined monthly from submissions by 18 designated banks, is under the influence of Beijing. This rate superseded the traditional benchmark lending rate in August 2019. According to Zichun Huang, an economist at Capital Economics, the reduction in the LPR will lessen the interest burden on existing loans, providing some relief to indebted businesses.
Despite expectations for additional easing in the next quarter, it is unlikely to significantly stimulate loan demand, Huang noted. A robust revitalization of economic growth would necessitate a more substantial fiscal intervention.
Recent data reveals that China's economy, the world's second-largest, is growing at its slowest rate in over a year, with the property market being a persistent hindrance to growth. GDP growth decreased to 4.6 percent in the third quarter, down from 4.7 percent in the previous quarter. Beijing's growth target for the year remains approximately 5 percent.
