China has cut a benchmark lending rate but defied market expectations by leaving another unchanged, as policymakers sought to shield banking sector profits while grappling with slowing economic momentum, a property sector cash crunch and a weakening currency.
The decision to cut just one loan prime rate (LPR) prompted economists at Citigroup to downgrade their annual growth forecast to 4.7 per cent, joining the growing ranks of Wall Street investment banks that project China’s full-year economic growth will fail to hit Beijing’s official target of “about 5 per cent”.
The one-year loan prime rate, a reference for bank lending, was cut 0.10 percentage points to 3.45 per cent, the People’s Bank of China announced on Monday. The equivalent five-year rate, which is closely watched because of its relationship to mortgage lending, was kept steady at 4.2 per cent.
Economists polled by Bloomberg had unanimously projected 0.15 percentage point cuts to both the one-year and five-year rates. The outcome was “quite surprising and frankly it’s a bit puzzling,” said Hui Shan, chief China economist at Goldman Sachs.
Five international investment banks, including Morgan Stanley and JPMorgan, have lowered their China growth forecasts in recent weeks in response to signs of slowing economic momentum in China. Despite Beijing lifting pandemic restrictions this year, growth has been hampered by a property cash crunch, declining exports and soaring youth unemployment. Last week the government announced it would stop publishing reports about the unemployment figures.
On Wall Street, only Bank of America and Goldman Sachs project growth of more than 5 per cent for 2023.
The increasingly pessimistic outlook on China’s economy reflects a widening gap between expectations of more forceful policy support and the government’s reluctance to deliver stimulus at a scale needed to reinvigorate growth. Citi analysts in a note attributed their forecast downgrade to “policy disappointment”.
Beijing has come under pressure to reduce interest rates and spur consumer demand. The PBoC last week unexpectedly cut the one-year medium-term lending facility, which affects loans to financial institutions, by 0.15 percentage points.
But Monday’s policy decision showed Beijing remained intent on insulating bank earnings, analysts said. The one-year LPR is partly set by China’s biggest banks, which are set to release second-quarter results this month.
“This looks like policymakers are putting a lot of weight on the banking system’s ability to run smoothly. They may want to protect banks’ net interest margins, which cutting the LPR can pull down,” said Shan at Goldman Sachs.
“At the end of the day, you need a healthy banking system to help absorb economic shocks and continue to deleverage [the property sector]”, which has been paralysed for two years by a liquidity crisis.
Monday’s decision also weighed on Chinese equities, with the Hang Seng China Enterprises index dropping almost 2 per cent despite a host of reforms announced on Friday intended to bolster investor confidence. The benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 1.4 per cent, while the renminbi fell as much as 0.4 per cent to Rmb7.3155 against the dollar.
Julian Evans-Pritchard, chief China economist at Capital Economics, suggested the “underwhelming” response meant the PBoC was “unlikely to embrace the much larger rate cuts that would be required to revive credit demand”.
“Hopes for a stimulus-led turnaround in economic activity largely depend on the prospect of greater fiscal support,” he added.
Goldman remains the most optimistic among big Wall Street investment banks on China’s 2023 growth prospects, holding its forecast at 5.4 per cent. But Shan acknowledged that the bank may have to reconsider if Beijing’s policy response continues to underwhelm.
“Our current assumption is that [policymakers] will ease real estate restrictions in first-tier cities and put more measures in place to support the property market in the coming weeks,” she said. “But if that fails to materialise we will have to rethink things.”