In an effort to stimulate credit demand, China cut its one-year benchmark lending rate as expected on Monday, but it was quite surprising that the five-year rate remained unchanged.
Due to a bleak outlook for the real estate market, weak consumption, and a significant decline in credit growth, the world's second-largest economy is struggling to recover, requiring further policy stimulus to boost economic revival.
The one-year Loan Market Quotation Rate (LPR) was reduced from 3.55% to 3.45%, a decrease of 10 basis points, while the five-year LPR remained at 4.20%.
A survey by Reuters of 35 market observers unanimously predicted a decline in both one-year and five-year rates.
Most of China's new loans and outstanding loans are based on the one-year LPR, while the five-year rate affects mortgage pricing. In June, China reduced both types of LPR to promote economic development.
The People's Bank of China (PBOC) unexpectedly cut the medium-term policy rate last week, enabling a reduction in the one-year LPR.
The Medium-term Lending Facility (MLF) rate, as the guiding rate for the LPR, is seen by the market as a "seismograph" for future changes in lending benchmarks.
According to its second-quarter monetary policy implementation report, the PBOC has pledged to ensure reasonably ample liquidity and precise and powerful policies to bravely face challenges and strongly support economic recovery.
The unexpected stability in the five-year rate caught many traders and analysts off guard, yet some had predicted further reductions in lending rates due to the real estate industry's crisis and the default risk faced by some developers.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, believes that the current status of the five-year LPR is a signal that Chinese banks are reluctant to cut interest rates at the cost of interest rate margins. This indicates issues with the effectiveness of the PBOC's policy guidance transmission to the market, suggesting that Chinese authorities might lack effective tools to stimulate the real estate sector and the economy through monetary easing. The unexpected interest rate outcome is unfavorable for China's economic growth prospects and the adjustment of the yuan exchange rate.
The onshore yuan exchange rate against the US dollar fell to 7.2978 in early trading, slightly declining from the previous trading day's 7.2855.
