China Finally Lowers Interest Rates (Comprehensive)

1-Year Maturity LPR Reduced by 0.05 Percentage Points, 5-Year Maturity LPR Reduced by 0.15 Percentage Points

[Asia Economy Senior Reporter Cho Young-shin] China, struggling with an economic recession, has lowered the Loan Prime Rate (LPR), which serves as the benchmark interest rate.

Photo by Xinhua News Agency Capture

The People's Bank of China, the central bank, announced on the 22nd that the 5-year LPR was set at 4.30%, down 0.15 percentage points from the previous 4.45% per annum. This is the first cut in the 5-year LPR in three months since the reduction in May.

The People's Bank also lowered the 1-year LPR, a standard for credit and corporate loans, by 0.05 percentage points.

The LPR is a figure compiled from the loan rates for the best customers at 10 designated banks and effectively serves as the benchmark interest rate in China.

Earlier, on the 15th, the People's Bank hinted at a rate cut by lowering the 1-year Medium-term Lending Facility (MLF) rate and the 7-day reverse repurchase agreement rate by 0.1 percentage points each.

Inside China, voices calling for easing real estate market regulations emerged after the release of industrial production and retail sales statistics last month. Since the real estate sector is making an already difficult economic situation worse, there were calls for party-level real estate policies.

In fact, the cumulative growth rate of real estate development investment in China until last month recorded a negative (-) 6.4%.

Also, the new home prices in 70 small and medium-sized cities in China fell by as much as 0.9% year-on-year last month, marking the largest decline since September 2015.

Retail sales, a gauge of domestic demand, also fell far short of market expectations (around 5%). Last month, China's retail sales increased by only 2.7% compared to the same period last year. Consumption, which started with the Shanghai lockdown, has yet to recover. Domestic demand accounts for more than 60% of China's Gross Domestic Product (GDP). Without domestic demand, there is no growth.

This is the background for the first cut in the 1-year LPR in six months. Although the cut was modest, Chinese experts agree that it is significant as it signals the possibility of further reductions depending on the economic situation.