China: Piecemeal easing continues with mini rate cut

China Macro: 1-year loan prime-rate cut by 5bp, to 3.80%.

Earlier today it was announced that Chinese banks unexpectedly cut the 1-year loan prime rate by 5bps, to 3.80%, for the first time since the initial covid-19 shock in early 2020. This will imply a marginal reduction in funding costs for Chinese corporates, as the 1-year loan prime rate functions as a benchmark for the bulk of corporate loans. The 5-year loan prime rate – a benchmark for mortgage rates – was left unchanged, at 4.65%. This move followed othertargeted easing steps. Last week, the PBoC lowered the reserve requirements ratio (RRR) by 50 bp, after a similar cut in July. The central bank also introduced targeted support measures, such as two new lending facilities to stimulate green investment and targeted rate cuts for specific facilities aimed to support SMEs and agriculture.

Further targeted, piecemeal easing is on the cards.

This mini cut fits within our expectation of a further piecemeal policy easing to stabilise growth. Given remaining risks from real estate and covid-19 policy/omicron, policy inaction would mean that full-year growth in 2022 would fall below Beijing’s preferred trajectory (also see our China Outlook for 2022, Growth risks to remain in Year of the Tiger). As also communicated by the annual Central Economic Work Conference (CEWC) earlier this month, policy makers are putting economic stability on the top of their priority list for 2022. That contrasts with this year: a focus on financial derisking – particularly in real estate – combinedwith strict covid-19 and environmental policies caused a self-inflicted slowdown in Q1-Q3 2021. We expect further targeted mini cuts of 1-year loan prime rate and some other policy interest rates in early 2022 and have pencilled in another 50bp RRR cut for next year as well. We also expect Beijing to take further measures to contain the drags from real estate.