As Beijing increases attempts to revitalize an economy hampered by a property crisis and a recurrence of COVID cases, China slashed its benchmark lending rate and lowered the mortgage reference by a greater margin on Monday, adding to last week's softening measures.
In its efforts to stimulate the economy, the People's Bank of China (PBOC) is balancing on a thin wire.
As the Federal Reserve and other countries hike interest rates rapidly, providing too much stimulus could exacerbate inflationary pressures and cause capital flight.
Even if the PBOC wants to maintain China's economy on a steady course, sluggish credit demand is pressing its hand.
At the central bank's monthly fixing, the LPR for loans with terms of one year decreased by 5 basis points to 3.65%, while the LPR for loans with terms of five years was reduced by 15 basis points to 4.30%.
In January, the LPR was cut by one year. Mortgage rates are affected by the five-year tenor, which was reduced in May.
According to Sheana Yue, China economist at Capital Economics, "the overall sense we get from all the PBOC's recent comments is that policy is being loosened but not significantly."
"We continue to project a reserve requirement ratio (RRR) decrease next quarter and expect two additional 10 bps cuts to the PBOC policy rates during the balance of this year."
Recent statistics revealed the economy was losing pace due to slowing global growth and rising borrowing costs, prompting the PBOC to slash the medium term lending facility (MLF) rate and another short-term liquidity instrument last week, which caught the markets by surprise.
Twenty-five out of thirty respondents in a Reuters poll from last week expected the one-year LPR to be lowered by 10 basis points.
Five-year tenor cuts were also predicted by 100% of respondents, with 90% of those expecting cuts of more exceeding 10 basis points.
The Chinese yuan dropped to near two-year lows as concerns over expanding policy divergence with other major countries weighed on investors' minds. The last reported price of the onshore yuan was $6.6832.
DECLINING MOMENTUM
Even though widespread lockdowns and a property crisis took a significant toll on consumer and corporate confidence in the second quarter, China's economy, the world's second largest, narrowly avoided falling.
In recent weeks, cases have increased again, and Beijing's strong "zero-COVID" campaign has been a drag on consumption.
Prospects for a robust recovery in China are being dampened by a combination of factors, including a slowdown in global growth and ongoing supply-chain snags.
Last week, a slew of statistics showed an unexpected slowdown in the economy in July, leading some international investment banks, like Goldman Sachs and Nomura, to lower their predictions for China's GDP growth for the full year.
Beijing aims for roughly 5.5% GDP growth annually, but Goldman Sachs predicts only 3.0% for all of 2022. It is notable that the government made no reference to the difficulty of attaining the GDP target during a recent high-profile policy meeting.
According to MUFG Bank's chief financial market analyst Marco Sun, "the asymmetrical LPR decreases occurred in line with our predictions."
Efforts by officials to stabilize the sector after a string of defaults among developers and a drop in home sales damaged consumer demand are highlighted by the greater cut to the mortgage reference rate.
China would back the industry, which contributes 25 percent to GDP, by guaranteeing bond offerings by a small group of private developers, Reuters reported last week.
According to Xing Zhaopeng, senior China strategist at ANZ, the LPR drop was required, "but the scale of the reduction was not adequate to increase financing demand."
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