MNI PBOC Watch: China To Cut LPR 20-25bp To Support Demand

MNI (BEIJING) - China's Loan Prime Rate will be reduced by 20-25 basis points next Monday following the People’s Bank of China’s 20bp cut to its key 7-day reverse repo rate last month, which will help guide down mortgage rates and reduce borrowing costs to shore up domestic demand. 

Authorities will set one-year LPR at either 3.10% or 3.15%  from 3.35%, while the over five-year maturity will fall to 3.60% or 3.65% from 3.85%. Both rates unexpectedly fell in July by 10bp after the central bank lowered the 7-day reverse repo rate by the same level. (See MNI EM: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional )

PBOC Governor Pan Gongsheng unexpectedly unveiled strong easing measures at the end of September as part of the country’s efforts to boost the economy, revealing a 20bp cut to the 7-day reverse repo rate to 1.5% from 1.7%, the biggest reduction since 2021. Pan noted the reduction would guide down the LPR by 20-25bp and see the medium term lending facility fall by 30bp.

The PBOC also reduced the Reserve Requirement Ratio by 50bp, pledging another 25-50bp cut if necessary later in 2024. (See MNI: China Needs Over 5.1% Growth In Q4 To Meet Targets)

MARKET BOOST

The positive monetary stance has boosted market sentiment, particularly the introduction of two new facilities targeting the stock market – the CNY500 billion Securities, Funds and Insurance companies Swap Facility and a CNY300 billion relending tool for stock buy-backs, which are expected to increase liquidity in stock market. 

The central bank will likely increase the tools' quota and expand the acceptable collateral if necessary in line with Beijing's greater emphasis on the capital market, a senior policy advisor told MNI. 

Disappointing economic performance has driven the additional measures. National Bureau of Statistics released Q3 GDP growth on Friday, which printed at 4.6% y/y, the lowest since Q1 2023, making the task of meeting the government’s 5% target harder. 

Economic policymakers have been charged with achieving the growth target, with domestic demand seen as a crucial factor. The central bank will also introduce measures to bail out the real-estate market via lower rates on outstanding mortgages, alongside pledges to support consumption. 

Tao Ling, deputy-governor of the central bank, told reporters on Thursday that the Bank will enhance its relending program as incentives to support the acquisition property to promote the use of idle land and improve cash flow in the real-estate sector. 

However, prompt and large-scale fiscal stimulus and central government borrowing will be crucial to ensure monetary easing is effective in boosting the economy and continuing to shore up market sentiment, a former PBOC official recently told MNI.