China to Reduce Lending Benchmarks Monday as Economic Conditions Decline, Reports Reuters

SHANGHAI/SINGAPORE (Reuters) – China is anticipated to lower its lending benchmarks during the monthly fixing scheduled for Monday, with numerous analysts predicting a significant reduction in the mortgage reference rate aimed at boosting credit demand and supporting the struggling property sector.

The loan prime rate (LPR), typically applied to banks’ prime clients, is determined each month based on proposals from 18 designated commercial banks to the central bank, the People’s Bank of China (PBOC).

In a survey of 35 market analysts, all respondents forecasted cuts to both the one-year and five-year LPRs, following an unexpected decrease in the medium-term policy rate this week.

The medium-term lending facility (MLF) rate, which guides the LPR, is predominantly viewed as an indicator for potential adjustments to lending benchmarks. The next monthly fixing of the LPR will take place on Monday.

Among the analysts surveyed, 19 participants, or 54%, anticipate a 15-basis-point reduction in the one-year LPR, which is currently at 3.55% and serves as the basis for most new and outstanding loans. The remaining 16 analysts predict a more modest 10 basis-point cut.

Additionally, 33 analysts, or 94%, expect the five-year rate, which acts as the mortgage reference rate, to be reduced by at least 15 basis points from its current rate of 4.20%.

Analysts from Citi noted, "Following the earlier-than-expected policy rate cut, we anticipate a 10 basis-point reduction in the one-year LPR and a 20 basis-point cut in the five-year LPR to further support the property sector." They also expect the central bank to implement a 25 basis-point reduction in banks’ reserve requirement ratios shortly.

The market’s anticipation of further monetary easing is influenced by economic data that indicates a sharp decline in credit lending and increasing deflationary pressures. Additionally, default risks among certain housing developers have undermined confidence in financial markets.

In light of the ongoing property market crisis, the central bank has pledged to adjust and optimize property policies, as outlined in its second-quarter monetary policy implementation report released this week.

Carlos Casanova, a senior economist for Asia at UBP, stated, "Based on the PBOC’s previous operations, we should expect a symmetrical, substantial cut of 10 to 15 basis points in both the one-year and five-year LPRs next week." He added that he anticipates the PBOC will continue with further cuts to reserve requirement ratios and balance sheet measures to address risks in vital sectors, including local government financing vehicle (LGFV) debt and regional housing markets.