Adding to last week's softening measures, China decreased its benchmark lending rate and lowered the mortgage reference rate on Monday. Beijing is stepping up attempts to revitalize an economy that has been hampered by a property crisis and a rise in COVID cases.
In its attempts to resurrect growth, the People's Bank of China (PBOC) is balancing on a razor's edge.
Overly generous stimulus policies could exacerbate inflationary pressures and risk capital flight if the Federal Reserve and other economies quickly boost interest rates.
To maintain China's economy on course, the PBOC is being forced to act by weak credit demand.
At the central bank's monthly fixing, the five-year LPR was cut by 15 basis points to 4.30%, while the one-year LPR was reduced by 5 basis points to 3.65%.
In January, the one-year LPR was last lowered. The price of home mortgages is influenced by the five-year tenor, which was most recently cut in May.
According to Sheana Yue, China economist at Capital Economics, "all in all, the sense we get from all the PBOC's recent announcements is that policy is being loosened, but not significantly."
"We continue to estimate a reduction in the reserve requirement ratio (RRR) next quarter and expect two additional 10 bps cuts to PBOC policy rates during the balance of this year."
The PBOC shocked the markets last week by lowering the medium-term lending facility (MLF) rate and another short-term liquidity tool as a number of recent data points indicated the economy was losing steam amid sluggish global growth and rising borrowing costs. The LPR cut follows the PBOC's surprise action last week.
25 out of 30 participants in a Reuters survey last week projected a 10-basis-point decrease in the one-year LPR.
All respondents predicted a decrease in the five-year tenor as well, with 90% of them anticipating a decrease greater than 10 bps.
The Chinese yuan declined to levels not seen in nearly two years due to concerns about growing policy divergence with other major economies. A dollar was last exchanged for 6.8232 onshore yuan.
DECLINE IN MOMENTUM
The second-largest economy in the world, China, just avoided falling in the second quarter as a result of widespread lockdowns and a real estate crisis that severely undermined consumer and corporate confidence.
Consumption is nevertheless hindered by Beijing's tight "zero-COVID" policy, and recent weeks have seen a recovery in instances.
The likelihood of a robust comeback in China is being undermined by a downturn in global growth and ongoing supply-chain issues, which just adds to the misery.
Numerous statistics revealed last week that the economy unexpectedly contracted in July, leading Goldman Sachs and Nomura, two major international investment firms, to lower their predictions for China's full-year GDP growth.
China's full-year GDP growth prediction for 2022 was slashed by Goldman Sachs from 3.3% to 3.0%, considerably below Beijing's aim of roughly 5.5%. The government skipped over mentioning the GDP objective in a recent high-profile policy meeting as an implicit admission of the difficulty in doing so.
Marco Sun, chief financial market analyst at MUFG Bank, stated that "the asymmetrical LPR cutbacks came in accordance with our predictions."
The deeper cut to the mortgage reference rate underlines efforts by policymakers to stabilize the sector after a string of defaults among developers and a slump in home sales hammered consumer demand, according to one analyst: "The policy intention was quite obvious... as the 15 bps cut to the 5-year LPR was meant to boost long-term financing demand."
According to sources speaking to Reuters last week, China will boost a sector that contributes 25% of the country's GDP by guaranteeing new onshore bond issuance by a small number of carefully chosen private developers.
The LPR drop was required, but according to Xing Zhaopeng, senior China strategist at ANZ, "the scale of the reduction was not enough to increase financing demand."
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