China reduces main lending rates to boost economic growth

China has lowered benchmark lending rates as expected at the monthly fixing on Monday, following previous reductions to other policy rates last month as part of a stimulus package to revive the economy. The one-year loan prime rate (LPR) was decreased by 25 basis points to 3.10% from 3.35%, while the five-year LPR was also cut by the same margin to 3.6% from 3.85%. The lending rates were last reduced in July.

People’s Bank of China (PBOC) Governor Pan Gongsheng had indicated that lending rates would decrease by 20 to 25 basis points on Oct. 21 during a financial forum last week. The PBOC had previously announced cuts to banks’ reserve requirement ratio by 50 basis points and the benchmark seven-day reverse repo rate by 20 basis points on Sept. 24, marking the most aggressive stimulus since the pandemic began. These measures aimed to support the struggling property sector and boost consumption. Additionally, the medium-term lending facility rate was cut by 30 basis points last month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. Since the Sept. 24 measures, the CSI300 Index has seen record-breaking daily moves and is up more than 14% overall. However, the yuan has depreciated by 1% against the dollar in that period.

While stocks initially reacted positively to the stimulus measures, recent sessions have shown some instability as concerns arose about the magnitude of policy support required to revive growth. Data released on Friday revealed that China’s economic growth in the third quarter was slightly better than expected. However, property investment had fallen by over 10% in the first nine months of the year. On the positive side, retail sales and industrial production showed improvement in September.

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Officials expressed confidence during a press conference on Friday that the economy can achieve the government’s full-year growth target of around 5%. They also hinted at another cut to banks’ reserve ratio by the end of the year. Chris Weston, head of research at Australian online broker Pepperstone, mentioned in a note that the impact of further easing on China & Hong Kong equity and the CNH remains uncertain, as market participants may be experiencing policy easing fatigue.

(Editing by Sam Holmes)