In further efforts to strategically curb the effects of China’s economic slowdown, the People’s Bank of China trimmed its one-year loan prime rate (LPR) to 3.7% from 3.8% today, January 20. This is the second time in two months that the central bank lowered the one-year loan prime rate, after reducing it to 3.8% from 3.85% in December last year. Additionally, the five-year loan prime rate was also slashed by 5 basis points, to 4.6% from 4.65%.
What this Means for China
This means that in China, most outstanding loans, as well as home mortgages, will become marginally cheaper. This is expected to boost housing demand and thus limit a major economic downside risk.
However, leading research firm Nomura’s Chief China Economist, Ting Lu, believes that the LPR cuts are too small to make any substantial change in mortgage lending volumes. Lu thinks it looks like Chinese authorities are treading slowly and strategically, and more one-year and five-year LPR cuts are on the way.
Moreover, Lu expects China to ramp up foreign exchange purchases to curb currency appreciation over the next few months. Notably, China is focused on preparing to buffer its economy against the interest rate hikes in the U.S. by diversifying its U.S. dollar assets and loosening its economic policy.
How the Markets Responded
Chinese property stocks, which were suffering from a debt crisis that had gripped the economy recently, responded immediately, with a jump in China’s major property indexes.
Moreover, tech biggies in the Hong Kong stock exchanges, such as Tencent and Alibaba (NYSE: BABA), also climbed in response. The Hang Seng Tech index climbed nearly 4%, as a result of the rate change.
The rally also trickled down to other Asia-Pacific markets, with a 1.11% jump in Japan’s Nikkei 225 index and a 0.68% climb in South Korea’s Kospi index, and Australia’s ASX 200 index inching up 0.14%.
However, the U.S. market was dealing with its own issues as Treasury yields retracted slightly after climbing to two-year highs earlier this week. The 10-year yield fell to 1.854% after touching 1.9% on Wednesday. With inflation and slow growth already pressurizing the economy, tighter policies, including more aggressive interest rate hikes, are still very likely throughout 2022.
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