(Yicai Global) May 23 -- The unexpected reduction of China's long-term lending benchmark, which may not be the last cut this year, should promote corporate credit demand and housing market recovery, according to industry insiders.
The decrease should affect corporate financing and mortgages, supporting medium and long-term lending, according to insiders interviewed by Yicai Global. Most of them said that the benchmark could still be further reduced.
At its monthly fixing, the People’s Bank of China slashed the five-year loan prime rate by 15 basis points to 4.45 percent on May 20 as the second decrease this year.
The move means that the focus has shifted from loose monetary policy to credit easing, so reserve requirement ratio cuts and LPR adjustments are still possible later this year, according to a team of Qin Peijing, chief strategist at Citic Securities.
In the capital markets, the effect was immediate. The Shanghai Composite Index closed up 1.6 percent at 3,100 on May 20. The Shenzhen Component Index climbed 1.82 percent and the Hang Seng Tech Index closed up 4.7 percent. The onshore renminbi was 6.6740 against the US dollar at 4.30 p.m. that day, strengthening by 938 basis points from the previous trading day.
The one-year LPR was left unchanged. That may be because the current corporate loan rate has been at the lowest levels since the era of reform and opening-up began more than 40 years ago, according to insiders. But residential mortgage interest rates are still relatively high. The property market has maintained a downward trend this year, causing adverse impacts on the macroeconomy.
The lowered five-year rate should cause savings for mortgagors. The cut indicates stronger financial policy support for housing demand that is inelastic, according to industry insiders.
The reduction should lower house purchasing costs, which helps meet residents’ reasonable housing demand and promotes consumption, said Wen Bin, chief researcher at China Minsheng Bank.
Besides the real estate market, the move should also directly benefit the manufacturing industry, boosting market confidence to recover gradually, said Zhou Maohua, a macroeconomic analyst at China Everbright Bank.
The accelerated recovery of property and manufacturing industries will drive a rebound in domestic consumption and investment, and is expected to promote the upward momentum in domestic demand to recover gradually, Zhou added.
The LPR cut responds to corporate financing needs as it is also a reference for the pricing of medium and long-term loans. The move will help reduce the medium and long-term loan rates for enterprises, boosting the willingness and capability of enterprises to resume production and expand investment, said Dong Ximiao, chief researcher of Merchants Union Consumer Finance. The slow growth in enterprises’ medium and long-term loans has become noticeable based on financial data from January to April, he added.
Editor: Emmi Laine, Xiao Yi