The People's Bank of China has cut the key interest rate on five-year loans (LPR) by 15 basis points to 4.45% to prevent a major recession and save the housing market. It is a second decline this year and the most significant in the entire history of observations. Most analysts expected a reduction of five basis points.
Why is this important? China's LPR rate, at which commercial banks lend to their best customers, serves as a benchmark for other loans, and the five-year maturity is used as a benchmark for mortgages.
Context. The central bank's decision to lower the five-year rate is the latest in a series of steps taken by China to overcome the real estate crisis. A lockdown amid a coronavirus outbreak threatens to push the economy into its first quarterly recession since early 2020.
According to the National Bureau of Statistics, sales of new buildings in China in April fell by 47% year-on-year, and prices in 70 cities declined for the eighth month in a row.
China's economy may contract in the second quarter as coronavirus restrictions continue to damage business activity. Consumer spending and industrial output fell sharply last month, and unemployment rate rose to the most significant level since the initial coronavirus outbreak in early 2020.
The real estate sector, which accounts for 30% of China's GDP, is in a deepening crisis. Evergrande, one of the country's largest developers, is undergoing a massive restructuring after defaulting on its huge debts at the end of last year. Analysts have long feared that the collapse of Evergrande could have ripple effects on the entire industry.
Quote. "The actions of the Central Bank signal that the management ... has decided to save the real estate sector as soon as possible. It also suggests that China is making great efforts to achieve its 5.5% growth target by 2022," said Zhaopeng Xing, senior China strategist at ANZ Research.
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Source: CNN