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China set to lower lending standards to revive faltering economy

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People wearing protective masks visit a main shopping area, following new cases of the coronavirus disease (COVID-19), in Shanghai, China January 21, 2022. REUTERS/Aly Song

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SHANGHAI, Aug 19 (Reuters) – China is expected to cut policy rates significantly on Monday, a Reuters survey has found, with the vast majority of respondents expecting a deeper reduction in the mortgage benchmark to prop up the ailing real estate sector and the broader economy. . .

The Lending Prime Rate (LPR), which banks normally charge their best customers, is set by 18 designated commercial banks that submit rate proposals to the People’s Bank of China (PBOC).

Twenty-five of 30 respondents to the Reuters snapshot poll predicted a 10 basis point reduction in the LPR year on year.

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All 30 participants expected a five-year duration reduction, with 27, or 90%, expecting a reduction of more than 10 basis points. Among them, 15 traders and analysts predicted a decline of 15 basis points, 10 a decline of 20 basis points and the other two a reduction of 25 basis points.

Most new and outstanding loans in China are based on the one-year LPR, which now stands at 3.70%, after a reduction in January. The five-year rate, which was last lowered in May, is influencing home mortgage pricing and is now at 4.45%.

The market consensus on LPR cuts this month comes as the PBOC earlier this week unexpectedly cut two key interest rates for the second time this year, in an attempt to revive credit demand in the economy affected by COVID. Read more

“We believe this could translate into more transmission of the easing to the real economy, via potential LPR cuts next week,” said Peiqian Liu, chief China economist at NatWest, as the LPR is now loosely linked to the central bank’s medium-term lending facility. assess.

“We expect the 5-year LPR to be cut by 15 basis points (bps) while the 1Y LPR will be cut by 10 bps, as banks step up support for mortgage demand.”

The notable dovish tilt in the PBOC’s monetary policy stance came after a series of key indicators, including lending data and activity indicators, showed the economy had slowed by unexpectedly in July.

The loss of growth momentum has raised the challenge facing policymakers amid growing headwinds, including a resurgence of local COVID-19 cases, inflationary pressures and a slowing global economy.

Political insiders and analysts told Reuters that the PBOC is set to take more easing action, although it faces limited room to maneuver amid concerns over rising inflation. and capital flight. Read more

“After this small rate cut and the likely subsequent LPR cut, the PBOC’s room to cut rates will be quite limited due to the widening interest rate differential between China and the US. United States and shrinking bank profit margins,” said Ting Lu, head of China. economist at Nomura.

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Reporting by Li Hongwei and Brenda Goh; Writing by Winni Zhou Editing by Shri Navaratnam

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