China’s central bank trims 1-year rate, but unexpectedly leaves 5-year rate unchanged

China’s central bank, the (PBOC), recently made decisions regarding its loan prime rates. The one-year loan prime rate, which influences most household and corporate loans,was  reduced by 10 basis points from 3.55% to 3.45%. This adjustment fell short of the expected 15 basis points cut according to a Reuters poll. The PBOC’s decision to keep the five-year loan prime rate, affecting most mortgages, unchanged at 4.2% surprised economists who anticipated a 15 basis point cut due to risks associated with the property sector. Notably, real estate companies like Country Garden and Evergrande are facing financial challenges.

These actions were viewed by some as underwhelming, indicating that the PBOC may not engage in larger rate cuts to stimulate credit demand. Julian Evans-Pritchard, Capital Economics’ head of China, mentioned that the potential for an economic turnaround might rely on increased fiscal support.

Following these developments, the Hang Seng Index in Hong Kong dipped by nearly 1.8% and the China Enterprises Index fell by up to 1.9%. The mainland-listed blue chips of the CSI 300 index also experienced a decline of up to 1%.

The PBOC’s recent decisions come in the wake of surprise cuts to short- and medium-term lending rates, prompted by economic data showing weak credit growth and emerging deflation risks. The central bank’s efforts to manage financial risks involve coordinating financial support for local government debt and addressing systemic risks. The PBOC also aims to optimize credit policies for the property sector and lower financing costs for the overall economy.

In addition to the rate adjustments, the PBOC lowered the rate on one-year medium-term lending facility loans to financial institutions and made reductions in overnight, seven-day, and one-month standing lending facility rates. These actions collectively reflect the central bank’s strategy to navigate the challenges facing China’s economy.