China cut its lending benchmark loan prime rate (LPR) for the first time in 20 months on Monday, in an attempt to boost growth amid economic headwinds, regardless of remaining concerns over loosening conditions in the highly leveraged property sector according to Reuters.

The one-year LPR was reduced by 5 basis points, from 3.85% to 3.80%, while the five-year LPR stayed at 4.65%.

The former determines most new and outstanding loans in China, while the latter affects the pricing of home mortgages, Reuters added.

The LPR is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s medium-term lending facility, South China Morning Post (SCMP) explained.

It had remained constant for 20 months, since the last adjustment in April 2020, when the one-year LPR was cut from 4.05% to 3.85%.

The new LPR cut was in line with expert predictions. Last week, 29 out of the 40 traders and economists polled by Reuters anticipated cuts in LPR. 

“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” said Xing Zhaopeng, senior China strategist at ANZ.

Nevertheless, he highlighted the fact that the five-year rate remained unchanged showing Beijing preferred “not to use the property sector to stimulate economic growth.”

According to SCMP, China is facing increasing growth pressure, represented by a range of indicators, including retail sales and investment growth, pointing to an economic slowdown. The turmoil has been worsened by a regulatory crackdown on the tech sector and new curbs to deal with rising COVID-19 cases.

China’s year-on-year economic growth is forecasted to fall below 4% in the fourth quarter of 2021, versus an 18.3% increase in the first quarter. This dramatic drop has raised worries over an economic hard landing, provoking calls for additional easing policies.

Reuters reported that the central bank’s two reserve requirement ratio (RRR) cuts this year have lowered the costs of lending of institutions, saving banks up to $4.39 billion, according to Goldman Sachs’ estimates.

Some analysts expect further easing measures from Beijing to cope with the economic downturn.

“We expect a further 45 basis point of cuts to the one-year LPR during 2022,” Mark Williams, chief Asia economist at Capital Economics, said in a note.

“The overall impression, including from [Monday’s] announcement, is that policy is being eased but not dramatically.”

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