The central bank also cut its five year loan prime rate by five basis point to 4.6%. It was the first such reduction since April 2020.
China’s prime rate on loans is the rate at which banks lend to their top customers. This rate serves as the benchmark for all other loans. A new or outstanding loan must be repaid within a shorter period of time due to the one-year maturity. The five-year term, however, is more flexible. It is often used as a reference point for mortgages.
China’s GDP increased 8.1% in 2021 according to government figures released earlier this week. However, it slowed down in the fourth quarter. Analysts believe the country will struggle more this year as the second-largest economy in the world tries to prevent coronavirus outbreaks by enforcing its zero-Covid policy and the property crisis continues.
Even Chinese President Xi Jinping — not normally one to remark publicly on economic policy — called on Western central banks earlier this week to avoid hiking interest rates too fast to fight inflation, as his country’s policies head in the opposite direction.
China’s central bank had already adjusted its policy prior to Thursday. The central bank reduced the lending rate for financial institutions earlier in the week. The central bank cut the loan prime rate by 0.5 percent last month. It also reduced the reserve requirement ratio (which determines how much cash banks should keep in reserve).
Sheana Yue (China economist at Capital Economics), wrote Thursday that China’s easing cycle was “in full swing” in a note.
“Today’s cut will immediately feed through on outstanding floating-rate business loans and should lead to cheaper loans to new fixed rate borrower,” she stated, noting that mortgages will be “slightly more expensive”, which should help boost housing demand.
Yue stated that “We expect additional easing actions to follow in the next months”, and added that it is possible for the central bank to make further reductions to the one year loan prime rate.
China is particularly concerned about preventing a collapse in China’s real-estate sector. The industry crunch began more than a year ago when Beijing started cracking down on excessive borrowing by developers — a move intended to rein in their high leverage and curb runaway housing prices.
But the problem escalated significantly last fall as Evergrande — China’s most indebted developer with some $300 billion in liabilities — began warning more urgently of liquidity problems.
Analysts have been worried for years that a collapse of China’s property markets could bring about greater risk to homeowners and the financial system.
Analysts at Nomura say that even so, the most recent measures “are not sufficient to boost the economy.”
They wrote that the “real drags to China’s economy” were the rising costs of China’s zero-Covid strategy for containing coronavirus waves, slowing export growth, and worsening property sector. To contain coronavirus, the no-tolerance policy has led to strict lockdowns and severe isolation.
The analysts said that policymakers also face constraints like the significant amount of unpaid debt held by local governments. Credit expansion could cause local governments to borrow more to solve their debt problems.