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JPM on 5Y LPR Cut

CHINA
  • The 1-year loan prime rate (LPR) was kept unchanged today at 3.70% (consensus: 3.65%; JPM: 3.60%), while the 5-year LPR was lowered by 15bps to 4.45% (consensus: 4.55%; JPM: 4.50%).
  • JPM thinks there are two important reasons behind today’s unusual policy move.
  • First, the policy aims to provide some cushion against weak housing market activities. 70-city new home prices fell into contractionary territory in April at -0.1%oya, the first time in nearly 6.5 years.
    • Housing activity collapsed in April (the weakest moment on record, based on JPM housing activity index), and many private developers may be at the tipping point of triggering more defaults if there is no recovery in housing demand and improvement in funding conditions.
    • Hence, it is one of a series of measures (e.g. , city-level housing policy adjustments observed recently) to help stabilize the housing market.
  • Second, this could provide meaningful support to free up more disposable income for consumption as the recent Omicron outbreak has hurt the labor market pretty hard. Premier Li has recently emphasized on the importance of stabilizing the labor market and creating new jobs, as well as promoting consumption. The government is also considering a fiscal subsidy to promote auto sales in rural areas, likely introduced in June.
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