A panoramic view of the People’s Bank of China, China’s central bank./Baidu
The People’s Bank of China, China’s central bank, announced on the 22nd that it would significantly reduce the Prime Loan Rate (LPR), the benchmark interest rate, to stimulate the economy. On this day, the People’s Bank of China reduced the 5-year LPR by 0.25 percentage points from 4.20% to 3.95%, and froze the 1-year LPR at 3.45% p.a. The People’s Bank of Korea’s LPR cut comes six months after lowering the one-year LPR by 0.1 percentage point from 3.55% to 3.45% per annum in August last year.
LPR refers to the average loan interest rate for the top customers of 18 Chinese commercial banks, and because the People’s Bank of China influences LPR through monetary policy and guidelines on various counters, it is effectively considered the base interest rate . The 1-year note affects the interest rates on general short-term loan products such as credit and corporate loans, and the 5-year note affects the interest rate on home mortgage loans. In particular, the 5 year bond is directly linked to personal home mortgage loans, so when interest rates are lowered, it has the effect of stabilizing the real estate market in the medium term to the long term. Financial Times, an economic magazine affiliated with the People’s Bank of China, recently argued that “lowering the 5-year maturity LPR will stabilize market confidence, revive investment and consumption, and ensure healthy development in the real estate market .” However, it appears that the Chinese authorities have decided to freeze the LPR for one year due to concerns about the decline in the value of the Yuan and the resulting capital outflow.
China, the world’s second largest economy, has no choice but to stimulate its economy even by lowering interest rates. China’s January consumer prices, published on the 14th, fell 0.8%, the biggest drop in 14 years and 4 months. The producer price index (PPI) also continued its negative run for 16 consecutive months. As China’s economy has not recovered since the coronavirus outbreak, prices have fallen sharply, increasing concerns about deflation (a sustained fall in prices). The insolvency of the real estate sector, which accounts for 25% of China’s gross domestic product (GDP), is also holding back the Chinese economy. Last year, real estate development investment in China decreased by 9.6% compared to the previous year, and the area and amount of pre-sale housing sales also decreased by 8.5% and 6.5%, respectively. Global investors are fleeing the Chinese stock market. Last month, there was a net outflow of foreign currency for six consecutive months, with 14.5 billion yuan (about 2.7 trillion won) flowing out of the Chinese stock market. Rapidly increasing local government debt has also emerged as a drag on China’s economy.
In the end, there is an analysis that the Chinese government has pulled the ‘interest rate cut’ card, which is the most obvious response to the economic crisis. In particular, the Chinese leadership is expected to present this year’s economic growth target of 5%, which is higher than market forecasts, at the Two Congresses, China’s biggest annual political event, to be held early next month, and a package immediate economic stimulus. is needed to make this happen. In fact, on the 5th, the Chinese authorities are focusing on providing liquidity by injecting 1 trillion yuan (185 trillion won) into the market by lowering the reserve requirement ratio. According to Bloomberg News on the 19th, Chinese state-owned banks allocated at least 60 billion yuan (about 11.115 trillion won) worth of loans to eligible real estate projects in accordance with government orders.
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