In response to the shock of the re-spread of Corona 19, as leverage to ‘stimulate the real estate economy’
One-year short-term interest rate is frozen… To manage the value of the yuan
China has cut the loan preferential rate (LPR), which is the de facto base rate. It is interpreted as a measure to stimulate the real estate market, which has been frozen in the aftermath of the new coronavirus infection (COVID-19) and the resulting lockdown measures.
The People’s Bank of China, the central bank of China, announced on the 20th that the five-year LPR for May stood at 4.45%, 0.15 percentage points lower than the previous month’s 4.6%. The one-year maturity LPR was frozen at 3.7%, the same as the previous month. LPR is the interest rate that all financial institutions in China use as the standard for lending, and is used as the de facto base rate.
This is China’s third LPR cut since December last year. In December of last year, only the 1-year LPR was cut by 0.05 percentage points, and in January of this year, the 1-year LPR and the 5-year LPR were lowered by 0.1 percentage points and 0.05 percentage points, respectively.
The People’s Bank of China, which cut only the 5-year LPR by a relatively large amount, is evaluated to have focused on recovering the frozen real estate market in order to alleviate the economic shock of COVID-19. This is because, when the LPR is lowered, the interest burden on home equity loans that individuals have to pay off will be reduced to the same extent, and this will bring about the revitalization of the real estate market.
China’s economy is at its worst since the outbreak of COVID-19 in early 2020. China’s economic growth in the first quarter was only 4.8%, and industrial production and retail sales fell by 2.9% and 11.1%, respectively, in April, partially reflecting the effects of the ‘Shanghai lockdown’ and ‘Beijing respread’.
New home sales in China fell 29% in March compared to the same period last year, Bloomberg reported. The real estate industry accounts for about 30% of China’s gross domestic product (GDP). The fact that China, which has been focusing on ‘regulation’ of real estate transactions since the second half of 2020, is turning to ‘stimulation’, such as further lowering the interest rate on loan repayment, is evidence that the Chinese leadership is concerned about the speed of the recent economic deterioration.
Initially, the global financial industry predicted that China would cut the one-year LPR, which has a relatively quick effect to stimulate the economy, instead of maintaining or slightly lowering the five-year LPR. Contrary to expectations, choosing to ‘maintain the status quo’ in the one-year LPR is interpreted as a result of being conscious of the depreciation of the yuan. This means that if short-term Chinese funds are released from the recent aggressive rate hike by the US, the depreciation of the renminbi will further depreciate and may lead to a deepening of foreign capital outflow.
Beijing= Youngbin Cho correspondent firstname.lastname@example.org
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