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China is slashing two different important lending prices as the thrift falters

June 21, 2023: On Tuesday, the People’s Bank of China slashes two different important lending costs for the initial time in 10 months to prop up growth in the second-largest economy of the world.

The Chinese central bank slashed the one-year loan prime rate by ten basis issues from 3.65% to 3.55% and trimmed the five-year loan prime rate by ten basis points from 4.3% to 4.2% for the first time since August.

“On their own, 10bps slashing are too little to make a great deal of difference to monetary conditions, especially since market interbank rates are already below policy speeds,” Capital Economics’ Julian Evans-Pritchard and Zichun Huang noted.

“But the PBOC tends to use changes in policy speeds as a signaling tool, with the heavy lifting being done by other tools such as adjustments to funding requirements and bank loan quotas,” they added. “The latest round of rate slash suggests these tools will be deployed too.”

The Hang Seng continent properties index, a gauge of Hong Kong-listed Chinese designers, decreased by over 3%, with Country Garden slumping by about 5%. Nearly half the participants in a Reuters poll had forecast deeper slashes of at least 15 bps to the five-year rate.

Losses in the belongings sector weighed on the mainland and Hong Kong stock benchmarks, while the onshore and offshore Chinese yuan traded at their lowest since late November.

The latest rate cut come on the heels of two monetary easing moves last week. Last Thursday, the PBOC slashed its every-year medium-term loan facility for the initial time in 10 months and lowered its seven-day reverse repurchase rate in the previous week on Monday.

Most household and corporate loans in China are based on the PBOC’s one-year loan prime rate, while mortgages are pegged to the five-year rate.

Tuesday’s move was widely expected after a slew of economic data in the last few weeks, from industrial production and fixed asset investment to retail sales and trade in May, decreased short of expectations. China appears to be teetering on the brink of deflation as reopening optimism fizzles.

Top investment banks, including Goldman Sachs and JPMorgan, recently cut their complete-year GDP estimates for China and warned of headwinds ahead.

On Friday, China’s State Council pledged to roll out “more forceful measures” promptly to “enhance the momentum of economic development, optimize the economic structure, and promote the sustained healing of the economy.”

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