China Cuts Key Rates to Boost Slowing Economy

An aerial view from a drone of the Evergrande City in Wuhan, Hubei Province, China, on Sept. 24, 2021. (Getty Images)

China lowered mortgage lending benchmark rates on Jan. 20, after data earlier in the week pointed to a darkening outlook for the country’s troubled property sector.

The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by China’s central bank on Monday to its short- and medium-term lending rates for the first time since April 2020.

December economic data showed further weakening in consumption and the property sector, both major growth drivers.

At a monthly fixing on Thursday, China lowered its one-year LPR by 10 basis points to 3.70 percent from 3.80 percent. The five-year LPR was reduced by five basis points to 4.60 percent from 4.65 percent, its first cut since April 2020.

Property firms’ shares and bonds jumped on Thursday following the LPR cut, as investors hoped it and other recent state measures would help to ease a funding squeeze in the sector that has seen a growing number of developers default on their debts.

Sheana Yue, China economist at Capital Economics, expects a further 20 bps cut to the one-year LPR in the first half of this year.

Interest rates on medium-term lending facilities (MLF) serve as a guide to the LPR. Market participants believe moves to the LPR should mimic adjustments to MLF rates.

Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages.