LPR Moves Show Focus On The Property Sector

The fact that this month’s Loan Prime Rate (LPR) fixings saw a larger-than-expected 15bp fall in the 5-Year LPR (although that was the modal outcome vs. the median of a 10bp step, per the BBG survey) and smaller-than-expected 5bp fall in the 1-Year LPR points to a focus on support for the housing sector (particularly in light of the recent announcement of special loans to support the construction of overdue, incomplete housing projects via policy banks), potentially based on guidance from the PBoC.

• A reminder that most estimates suggest that the construction sector and related activities account for somewhere in the region of 25-35% of Chinese economy activity, with the well-documented headwinds that the sector has faced over the last couple of years, coupled with the government’s zero COVID strategy, blunting Chinese economic growth.
• The smaller-than-expected 5bp cut in the 1-Year LPR fixing suggests that banks are cognisant of lacklustre demand for credit given the above worries, while there is rising fear surrounding the prospect of a liquidity trap in China, which may mean that banks will be tentative when it comes to passing on lower credit costs.
• Worries surrounding banks’ NIM may also have been a consideration here.