China’s first benchmark rate cut in 20 months signals ‘serious easing cycle is unfolding’

Some analysts say Beijing should ease policy further to finance infrastructure, as the country may have to defend a growth rate of 5 per cent in 2022

The LPR adjustment followed a 50-basis-point cut to the reserve requirement ratio last Wednesday and a partial cut of the relending rate a week earlier

3-MIN READ3-MIN

China bounced back strongly from the initial impact of the coronavirus in early 2020, but economic momentum has slowed in recent months. Photo: AFP

Published: 11:00pm, 20 Dec 2021Updated: 12:27am, 21 Dec 2021

The first cut to China’s one-year market benchmark rate in 20 months indicates the government’s determination to stabilise economic growth next year, but economists are still divided on how effective such easing measures will be as major Western countries tighten monetary policy.

Some analysts have called on Beijing to loosen purse strings further to finance infrastructure projects, as the country may have to defend a growth rate of 5 per cent in 2022.

The People’s Bank of China (PBOC) on Monday slashed the one-year loan prime rate (LPR), a weighted lending rate based on offers of 18 major banks and a de facto market benchmark, by 5 basis points to 3.8 per cent. However, the five-year LPR – which is linked to mortgage rates – remained unchanged at 4.65 per cent.

The central bank also sold 10 billion yuan (US$1.5 billion) of seven-day reverse repos and 10 billion yuan of 14-day reverse repos – both of which are frequently used as liquidity injection tools – leaving both rates unchanged at 2.2 per cent and 2.35 per cent respectively.

There should be no doubt by now that a serious, though still restrained, easing cycle is unfolding

Wei Yao

“There should be no doubt by now that a serious, though still restrained, easing cycle is unfolding,” Wei Yao, chief Asia economist at Societe Generale, wrote in a note.

China bounced back strongly from the initial impact of the coronavirus in early 2020, but economic momentum has slowed in recent months amid multiple headwinds, including widespread power shortages that have hurt industrial output, and high shipping costs and raw material prices have started to squeeze small producers.

The LPR adjustment followed a 50-basis-point cut to the reserve requirement ratio last Wednesday, which injected 1.2 trillion yuan of liquidity into the interbank system, and partial cut of the relending rate a week earlier.