China's latest interest rate cuts are unlikely to revive sluggish credit demand and may further squeeze banks' margins.
The People's Bank of China on Aug. 22 cut its one-year loan prime rate, or LPR — on which most new and outstanding loans are based — by 5 basis points to 3.65%, while the five-year LPR — typically a reference rate for mortgages — was reduced by 15 basis points to 4.30%. That followed a 10-basis-point cut to both the one-year medium-term lending facility rate and seven-day reverse repo rate on Aug. 15 following a poor set of July economic indicators.
One hundred basis points make up 1 percentage point.
The cuts are expected to provide some short-term relief for borrowers, though they are unlikely to boost consumption sentiment or confidence in the country's property market.
The change to the five-year LPR reflects the seriousness of the property market downturn and sends a strong message that policymakers are willing to take more forceful actions to stabilize the market, said David Chao, a market strategist at Invesco. However, the cut to the one-year rate "isn't going to move the needle" on boosting credit demand, Chao added.
Several central banks, including the U.S. Federal Reserve, have sharply hiked interest rates to cool decades-high inflation. In contrast, China continues to ease monetary policy to support its economy, especially the property sector. This industry has faced a growing inventory of unsold and delayed homes that culminated in rare boycotts of mortgage payments this year.
More to follow
The world's second-largest economy is expected to miss its 2022 GDP growth target of 5.5% after reporting 4.8% and 0.8% year-over-year growth in the first and second quarters, respectively, as it continues to press on with its dynamic zero tolerance policy toward COVID-19.
More measures, including possible special loans to housing projects in trouble and government rescue funds, to support the property market and to prevent risks from spreading to other sectors are likely.
"There will be at least one more cut in the 5-year LPR this year," said Iris Pang, chief economist for Greater China at ING. Some signs of improvement in the property market could be visible by the last quarter, or by early 2023, mainly in the form of progress in construction of uncompleted projects and in home buying sentiment, Pang added.
Banks, already hit by contracting interest margins and stalled loan growth, may face more pain. China Merchants Bank Co. Ltd., reported a 14-basis-point year-over-year fall in its net interest margin to 2.37% in the first half of 2022, according to interim results released late last week. The lender's NIM drop was faster than expected, according to a Credit Suisse note dated Aug. 22.
Ping An Bank Co. Ltd. reported a contraction in its NIM as well.
Most major Chinese banks are due to announce their results for the quarter ended June this week.