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Wednesday, June 29, 2022

China surprisingly cut interest rates to boost its economy

China on Friday unexpectedly cut its benchmark reference rate for mortgages by a wide margin, its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. Senior officials have promised more measures to fight a slowdown in the world’s second-largest economy hit by the COVID-19 outbreak, which prompted stringent measures and mobility restrictions and caused huge disruptions in activity. Many market participants believed Friday’s move was a response to Chinese Premier Li Keqiang’s call to decisively increase policy adjustments and allow the economy to return to normal quickly. “Today’s five-year loan prime rate reduction will aid a revival in housing sales, which have recently gone from bad to worse,” Julian Evans-Pritchard of Capital Economics said in a note. “But the lack of any reduction in the one-year LPR suggests that the PBOC is trying to keep the target easing and we should not expect the kind of massive stimulus we saw in 2020.” China, in monthly fixing, reduced the five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest reduction since China reintroduced the interest rate mechanism in 2019 and by five or 10 basis points. tipped more. In a Reuters poll. The one-year LPR was unchanged at 3.70%. The country’s benchmark stock index Shanghai Composite Index rose nearly 1 per cent in early trade on a rate cut on Friday. The move failed to excite mainland-listed property stocks, which were flat, although Hong Kong-listed developers rose slightly. Many private sector economists expect China’s economy to shrink this quarter from a year ago, compared to a 4.8% growth in the first quarter. Indicators of credit lending, industrial production and retailing showed that the stringent COVID-related measures and mobility restrictions have taken a heavy toll. One of the major pressures on growth has been the property sector, which policymakers want to change. Property and related industries such as construction account for more than a quarter of the economy. China’s property sales in April fell at the fastest pace in nearly 16 years, while new new home prices fell month-on-month for the first time since December, hurt by weak demand amid widespread COVID-19 lockdowns. “Policy makers can reach a consensus on how to revive the property sector,” said ANZ senior China strategist Jing Zhaopeng, predicting further easing measures. Limited room for cuts The central bank has promised to increase support for a slowing economy, but analysts say policy easing may be limited by concerns about capital outflows as the Federal Reserve raises interest rates. Is. Capital Economics believes that the lack of a one-year LPR cut suggests that the central bank may be concerned about capital outflows and a possible impact on the yuan. The LPR is a lending reference rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use a five-year LPR for mortgages, while most other loans are based on a one-year rate. Both rates were reduced in January to support the economy. Friday’s cuts showed “China’s economic growth was facing increasing resistance this year,” said Marco Sun, chief financial markets analyst at MUFG Bank. Eighteen out of 28 traders and analysts in a Reuters poll predicted any rate reduction, including 12 who expected a 5-basis-point cut for each period. A drive by authorities to ease high debt levels turned into a liquidity crisis among some major developers last year, resulting in bond defaults and shelving projects, rocking global financial markets. Since late last year, Beijing has taken steps to help revive the property sector. These include making it easier for large and state-owned developers to raise funds, easing rules on escrow accounts for pre-sale funds, and allowing some local governments to cut mortgage rates and down-payment ratios. This week, financial authorities cut mortgage rates for some home buyers. But that measure and Friday’s cuts alone will not ease financing stress for developers, many of whom are struggling to refinance loans. Goldman Sachs estimates that the first home mortgage rate floor will be lowered to 4.25% from the earlier 4.4%. Property stocks have made a recent comeback, but the muted reaction to Friday’s cuts suggests some investors think it may not be enough to revive the struggling sector.

Reuters)

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