PBoC trims five-year loan prime rate more than expected

Rate-setters in China took decisive steps to bolster its property market on Tuesday, by implementing the first cut in its benchmark five-year loan prime rate since June.

The move from the People’s Bank of China (PBoC) came as Beijing worked to revitalise the country’s sluggish real estate sector amid economic challenges.

While the one-year loan prime rate, which influences most household and corporate loans, remained unchanged at 3.45%, the PBoC announced a 25 basis points reduction in the benchmark five-year loan rate to 3.95%.

The decision to slash the five-year rate for February's monthly fix went further than market expectations, with most analysts anticipating a more conservative reduction of between five and 15 basis points, according to Reuters polling.

China’s loan prime rates, recalculated monthly after input from 20 designated commercial lenders, typically align with the country’s medium-term policy rate, which the PBoC chose to maintain for February.

The move did follow Beijing’s recent reduction of reserve ratio requirements for banks by 50 basis points starting from 5 February , injecting CNY 1trn (£110bn) of long-term capital into the financial system.

“In our view, the combination of a cut to the five-year LPR today, a 25-basis point RRR cut in January, and non-moves to the one-year medium-term lending facility and LPR in recent months signals authorities' continued preference for targeted easing, and their desire to ramp up support for the property sector,” said Oxford Economics lead economist Louise Loo.

“Today's move is also consistent with how we think authorities are diagnosing China's property problem, which will drive a managed 'staircase-shaped' correction path.

“[It is] Not just about housing delivery - a late-2022 to late-2023 policy focus - but also about cleaning up the excess inventory sitting on private developer balance sheets - and possibly transferring onto the government balance sheet - through a mix of monetary and fiscal easing.

“On the monetary front, we continue to expect another 25-basis point cut to the RRR in the second quarter.”

According to CNBC, the Chinese property market had been going through a downturn following Beijing cracking down on developers’ excessive reliance on debt for growth in 2020, which led to the bankruptcy of some of China's largest real estate firms.

Reporting by Josh White for Sharecast.com.