Editorial | China lending rate cut a calculated move to lift property sector
- People’s Bank of China held firm on one-year loan prime rate in a bid to curb outbound capital flows seeking higher returns in United States, where rates are at 20-year highs
Market watchers were expecting the People’s Bank of China to cut the five-year-loan prime rate, the key reference rate for commercial bank home mortgages. But the bank has confounded modest predictions, mostly in the range of 10 to 15 basis points, comparable with the 10 basis point cut last June, the only previous one since the system was introduced in 2019.
The surprise reduction of 25 basis points, from 4.2 per cent to 3.95 per cent, is aimed at propping up the beleaguered property industry and helping it climb out of a prolonged slump that is weighing on the whole mainland economy.
This is a cut on the lending side only, following cuts to the deposit rate late last year, in the hope that it will have an immediate positive effect on demand for housing. The government is adopting a selective or somewhat piecemeal approach towards cutting rates, reflected also in the decision to hold the one-year-loan prime rate – an indicator of market lending rates for business – unchanged at 3.45 per cent.
This is because of the interest-rate differential between China and the United States, where rates are the highest for more than 20 years. There are continuing concerns about the prospect of capital flight from China in search of higher returns, were there to be an across-the-board cut including deposit rates.
The US Federal Reserve did nothing to ease this concern earlier this month when it not only held the benchmark rate at 5.25 per cent to 5.5 per cent, but moved unequivocally to cool speculation that it would begin cutting rates as early as next month.