Market Insight – China Rate Decision

The People’s Bank of China slashed two key lending rates for the first time since August 2022, at the June fixing, as authorities seek to prop up growth, in line with market expectations.

The one-year loan prime rate, which is the medium-term lending facility used for corporate and household loans, was lowered by 10 basis points to 3.55%; while the five-year rate, a reference for mortgages, was trimmed by the same margin to 4.2%.

Tuesday’s move came after two easing decisions last week, with more stimulus from Beijing expected. Chinese cabinet met last Friday to discuss measures to support economic recovery, trying to step up financing support for tech companies and draft rules for supervising private funds.

Meantime, several global investment banks, most recently Goldman Sachs, cut their 2023 GDP growth forecasts for China following weak economic data for May.

Citi also cuts its China GDP forecast for 2023 to 5.5%, from 6.1%. Nomura note issued Friday, says the firm has cut its forecast for China’s 2023 GDP growth to 5.1% from 5.5%.

Nomura note that “in view of the worsening downward spiral of major activity data and Beijing’s tepid response to date, we lower our GDP growth and inflation forecasts”.

They add that they expect China to introduce a raft of supportive measures to follow the rate cuts, and the cut comes as China’s economic growth has faltered, losing steam after an initial bounce out of COVID.

UBS revised down its China 2023 GDP growth forecast to 5.2%, from 5.7% previously. UBS are seeing early data for June as weak also, saying it’s not obvious that there is any improvement.

Policy moves out of China are expected, the recent monetary policy rate cuts may be a signal that additional policy support measures are incoming, including property policy-easing, infrastructure investment boost, further cuts to policy rates and other boosts to credit supply, and some forms of local-government financing-vehicle debt restructuring or swap.