China benchmark loan rate drops after PBOC eases policy

Hong Kong

CHINA'S banks lowered the benchmark borrowing costs for new corporate and household loans after Beijing slashed a range of policy rates this month to blunt the economic impact of a deadly Covid-19 outbreak.

The one-year loan prime rate (LPR) was lowered to 4.05 per cent from 4.15 per cent, according to a statement from the central bank on Thursday. The five-year tenor was set at 4.75 per cent, down from 4.8 per cent.

Earlier this month, the central bank cut the rates on its short-term funds and one-year loans to commercial lenders.

China's economic growth is coming under pressure because a fatal outbreak of the novel coronavirus has shut down much of the economy. The health crisis has prompted investment banks to lower their forecasts for the nation's gross domestic product. The virus has killed more than 2,100 people and infected tens of thousands of others.

The decline of 10 basis points in the one-year LPR was in line with expectations, while the smaller drop in the five-year rate indicates the central bank has no intention of changing its stance on property policy, said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd in Hong Kong.

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"If the sentiment improves over the next few weeks as new virus cases are dropping, they will hold the fire for a while," he said, adding that another reserve ratio cut for banks is still possible if growth momentum fails to pick up.

In a monetary policy report published on Wednesday evening, the People's Bank of China (PBOC) said the impact of the coronavirus would be "short-lived" and "limited in terms of duration and scope", indicating that it is more concerned about a temporary shock to growth.

It also said that it will work to promote consumption and investment to boost domestic demand, while repeating an earlier pledge to maintain room to manoeuvre within conventional monetary policy, signalling there's little chance of an aggressive easing.

The LPR is considered China's de facto benchmark funding cost after a revamp of the interest-rate system last year. The rate decided by a group of 18 banks is released on the 20th of every month. The steady decline in the LPR since August last year has led to lower borrowing costs in the wider economy, with the weighted average rate for ordinary loans falling to 5.74 per cent in December from 5.96 per cent in September.

"I expect to see further LPR declines and and RRR cuts in coming months," said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. "The strong fiscal stimulus should share the burden to support growth so that the PBOC could do its easing job at a more orderly pace." Optimism about what appears to be a slowdown in the virus contagion in China and bold fiscal stimulus could also help keep yuan depreciation in check, said Mr Cheung. BLOOMBERG