MNI STATE OF PLAY:China LPR Trim A Property Boost As CNY Falls

China’s lending institutions lowered the reference lending rate for mortgage loans in a bid to stimulate the property sector which has dragged down overall credit demand, and further rates cuts are expected to shore up the wider economy, analysts said.

As anticipated in MNI's State of Play (Analysts See PBOC Point To Lower August LPR), transmitted 18 Aug., the five-year Loan Prime Rate (LPR) was trimmed 15bp to 4.30% on Monday, following the medium-term Lending Facility cut by the People's Bank of China early last week. The smaller 5bps 1-year LPR cut was below market consensus, which forecast a 10bps reduction.

The second LPR cut in three months for the 5-year and above tenor was largely due to sluggish housing sales data, according to Minsheng Bank chief economist Wen Bin, with weak mortgage demand as well as a need to boost wider economic growth at play. Wen saw further room for the mortgage loan rate to decline.

Referring to the smaller cut in 1-year LPR, Wen underlined the general view that the benchmark short-term rate was already low and a bigger cut could have triggered rate arbitrage, as some deposit rates may be higher than loan rates.

SLIDING YUAN

The weaker yuan may also have factored into the more modest cut in the shorter-dated LPR. Onshore dollar-yuan broke above 6.84 on Friday as the Chinese currency weakened throughout the week following the PBOC’s MLF cut, with the move accelerating Monday to above 6.86.

The yuan has seen a rapid depreciation since August 15, with the offshore CNY brearking above 6.82 on Friday, both pairs ending the week by up 1000pips.

Analysts at China Merchants Securities noted any unexpected cut in the LPR would weigh on the yuan and a further depreciation would be not impossible.

Analysts at China Construction Bank said the yuan’s weakness was due to China’s disappointing credit data, economic performance in June and the PBOC’s surprise MLF cut. At the same time, the dollar surged across the board on the renewed hawkish sentiment on Fed rates, with the dollar index rising above 108.00.

CCB see the potential for further yuan weakness, but not at the pace seen in April and May.

LATEST LPR TRIM INSUFFICIENT

Even though the five-year LPR has fallen a cumulative 35bps this year in three cuts, it is not seen as enough to incentive house buyers, with Tao Chuan, an analyst at Dongwu Securities, predicting another 20bps of cuts this year -- alongside a policy package to bail out the property sector.

Meanwhile, other analysts note that cuts in the LPR won’t alleviate some of the other measures restricting mortgage application and house buying. Gao Ruidong, analyst at Everbright Securities, said the key factor curbing credit expansion now is the weak economic outlook, with both household income and corporate profits facing uncertainties against a background of continued Covid controls. Lowering borrowings to stimulate credit demand will need time to bear fruit, he said.

China's onshore yuan against the U.S. dollar

Source: Bloomberg