China cuts slightly its new one-year lending benchmark rate

[SHANGHAI] China marginally cut its new one-year benchmark lending rate for the second month in a row on Friday, as the central bank seeks to guide borrowing costs lower for an economy hit by the US-China trade war.

But the five-year benchmark rate was unchanged, which some analysts say reflects policymakers' concerns that low rates for long tenures could reflate a propoerty bubble.

The largely-expected reduction in the one-year Loan Prime Rate (LPR), now at 4.20 per cent, came after the People's Bank of China (PBOC) lowered banks' reserve requirements on Monday. It also comes shortly after the Federal Reserve cut US interest rates by 25 basis points (bps).

The one-year LPR dipped to 4.20 per cent at its monthly fixing on Friday, 5 bps lower than 4.25 per cent in August. The five-year LPR was unchanged at 4.85 per cent.

"The PBOC is experimenting with this new system. They are lowering rates very gradually and trying to measure the impact and see where the money flows as a result," said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management in Tokyo.

A PROTECTION STORY?

Iris Pang, Greater China economist for ING in Hong Kong, said the move "is not a growth-stimulation story, I think it is more a protection story, to not fall into a weaker growth range. Growth has been very weak and this is more for lowering interest costs for production and infrastructure."

Friday's cut was the second for the one-year LPR, a lending reference rate set by 18 banks that the PBOC revamped last month, loosely pegging it to the rate on its medium-term lending facility (MLF). The MLF rate, at 3.3 per cent, was last cut in early 2016.

A lower LPR could translate to lower borrowing costs for companies and consumers in a slowing economy.

The cut in one-year LPR was widely expected. A Reuters poll on Thursday showed that most traders anticipate the rate to fall less than 10 bps.

Wang Yifeng, analyst at Everbright Securities, forecast another 5-10 bp fall in LPR in November, arguing bigger reductions in financing costs are necessary as the long-running trade war takes a deeper toll.

China's economy grew 6.2 per cent in the second quarter, the slowest pace in nearly three decades, and weak industrial production, consumption and investment data in August points to the slowdown deepening.

Earlier this week, Chinese Premier Li Keqiang said it is "very difficult" for China's economy to grow at a rate of 6 per cent or more.

But while the PBOC seeks to boost credit to the real economy, it has so far avoided flooding the banking system with excessive liquidity. On Tuesday, the central bank kept its MLF rate unchanged, preventing LPRs from falling too sharply.

REUTERS