Investors are let down by China’s ‘underwhelming’ major interest rate decision.

Estimated read time 3 min read

Investors are let down by China’s ‘underwhelming’ major interest rate decision.

In a move that experts say will make it difficult to rebuild trust in the country’s struggling real estate sector, which has weighed down hopes for the world’s second largest economy, China has startled investors by deciding not to decrease an essential interest rate that effects mortgages.

On Monday, the People’s Bank of China (PBOC) reduced its one-year loan prime rate by 10 basis points from 3.55% to 3.45% while maintaining its five-year loan prime rate (LPR), which is now at 4.2%.

Although the reduction in the one-year rate was generally anticipated, nothing similar was said about the five-year rate. Almost all of the analysts surveyed by Reuters expected the mortgage reference rate, the five-year rate, to decline by at least 15 basis points.

The result was “underwhelming,” Capital Economics’ Julian Evans-Pritchard and Zichun Huang said in a research note on Monday.

The most recent round of cuts “is too small to have a big impact on its own,” noted economists from China. This confirms our belief that the PBOC is unlikely to support the considerably bigger rate decreases necessary to boost credit demand.

The LPR establishes the rate of interest that commercial banks charge their most valuable customers and acts as the standard for lending to individuals and businesses. Most new and existing loans are impacted by the one-year rate, whereas longer-term loans like mortgages are impacted by the five-year rate.

The cost of borrowing would be cheaper if the rate were to drop for individuals taking out loans or paying off interest.

As a result of the announcement, stocks in Hong Kong and mainland China as well as the Chinese currency declined. Shanghai Composite (SHCOMP) ended 1.2% lower while Hong Kong’s Hang Seng (HSI) closed 1.8% lower, entering a bear market.

As worries about the future of the Chinese economy grow after last week’s release of yet another month’s worth of weak economic statistics, the Chinese yuan has fallen roughly 6% against the dollar so far this year.

In addition to its real estate market problems, China is dealing with deflation, reduced exports, and record-high youth unemployment.

After China unexpectedly reduced another rate, its medium term lending facility (MLF), last week, economists had anticipated decreases in the loan prime rate. On Tuesday, it reduced that by 15 basis points to 2.5%.

New reductions on Monday were “pretty much a given,” according to Capital Economics, because the loan prime rate is connected to the MLF.

Even if the PBOC had reduced rates as much as anticipated in accordance with expectations, it would have been “far from being enough to boost growth,” according to analysts at Goldman Sachs.


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