China Likely to Fully Implement Quantitative Easing... LPR Cut Following RRR Reduction
0.05%p Cut After 20 Months, Additional Cut Possible in Q1 Next Year
[Asia Economy Beijing=Special Correspondent Jo Young-shin] China has lowered the Loan Prime Rate (LPR) by 0.05 percentage points for the first time in 20 months.
The People's Bank of China, the central bank, announced on the 20th that the 1-year LPR for December was recorded at 3.80%, down 0.05 percentage points from 3.85% in the previous month. The LPR is the average of the best loan rates reported by 18 banks in China and effectively serves as the benchmark interest rate. China had previously cut the 1-year and 5-year LPR by 0.20 percentage points and 0.10 percentage points respectively in April last year.
◆ LPR Cut Sends a Signal to the Market
Within China's financial sector, it was expected that the People's Bank of China would cut the LPR once either this month or early next year. Typically, the LPR is lowered by 0.05% to 0.25%. The size of this cut suggests that the situation is not as bad as feared.
However, the move is seen as a strong enough signal to the market that the economy is not doing well. There is also growing analysis that this modest cut takes into account price stability. Lowering interest rates implies an intention to inject money into the market to stimulate the economy.
In fact, the Chinese leadership diagnosed at the Central Economic Work Conference that next year the Chinese economy will face three pressures: 'demand contraction,' 'supply shocks,' and 'weakened expectations.' They also stated their intention to lead growth through cautious monetary policy and proactive fiscal policy, aiming for steady progress amid stability.
The financial sector in China expects the People's Bank of China to make additional LPR cuts in the first quarter of next year depending on economic conditions. If the economy contracts further, there is a high possibility of an additional 0.20 percentage point cut.
◆ China’s RRR Cut + LPR Cut = Quantitative Easing
On December 6, ahead of the Central Economic Work Conference, Chinese financial authorities announced a 0.5 percentage point cut in the reserve requirement ratio (RRR). As a result, from the 15th, the average RRR in Chinese banks dropped to 8.4%.
The RRR is the ratio of cash that banks and other financial institutions must hold at the central bank. A cut in the RRR means that the amount of cash banks must hold has decreased. With the 0.5 percentage point cut, Chinese banks gained a lending capacity of 1.2 trillion yuan (approximately 223 trillion Korean won).
Following the preparation of lending funds, the cut in lending rates means that the preconditions for injecting money (quantitative easing) have been completed. However, since injecting money could create inflationary pressure, it is widely expected that Chinese financial authorities will control the pace carefully.
◆ Waning Momentum in the Chinese Economy
After the announcement of China’s third-quarter economic growth rate (4.9%), concerns about the Chinese economy have emerged across the market. The structure inevitably leads to a lower growth rate in the fourth quarter due to the base effect, compounded by domestic and international adverse factors such as power shortages, rising global raw material prices, global logistics bottlenecks, and the resurgence of COVID-19.
The real problem is next year. While this year’s initial target of 'above 6%' is expected to be achieved, there is growing skepticism about next year.
In fact, the Chinese Academy of Social Sciences has projected next year’s growth rate at 5.3%. Within China, forecasts mostly range between 5.0% and 5.5%. This is 1 percentage point lower than this year’s government target of 'above 6%.'
Within China, there is also no ruling out the possibility that the government will deploy fiscal policy depending on economic conditions.
Premier Li Keqiang previously convened a State Council executive meeting, stating, "Downward pressure on the economy in the second half of the year is severe," and urged, "Please expedite the issuance of local government bonds with remaining quotas so that funds can be used for major livelihood projects such as expanding domestic demand and promoting consumption."
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