China has decided to cut interest rates on loans as the economic recovery drags on

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China is expected to make the biggest cuts to its two key lending rates this year as pressure mounts on policymakers and banks to reverse the slowdown and revive flagging demand in the world’s second-largest economy.

The People’s Bank of China is set to announce cuts in one-year and five-year lending prime rates at a monthly meeting on Monday, which will affect borrowing costs for businesses and households, after a surprise cut in its closely-held media. Last week period funds rate.

Policymakers in Beijing have struggled to address a number of challenges since lifting pandemic restrictions earlier in the year, including a slowdown in the property sector, weak exports, record youth unemployment and deflation due to declining consumer confidence.

Most economists polled by Bloomberg expect the one-year LPR, which backs mortgage lending, to drop by 15 basis points, the largest range since January 2022. A similar cut in the five-year rate would be the largest in one year. . LPR rates are currently 3.55 and 4.2 percent respectively.

Economists polled were unanimous in expecting a cut in LPR, which generally reduces medium-term lending comfort. The MLF rate, which manages banking sector liquidity, is now at 2.5 percent, the lowest since it was launched in 2014 after last week’s cut.

Beijing has held off on unleashing major stimulus despite months of disappointing economic data, with consumer prices slipping into deflationary territory in July and growth of just 0.8 percent in the second quarter versus the previous three months.

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But missed bond payments this month from storage properties linked to real estate developer Country Garden and investment firm Zhongzhi have raised alarm among observers.

„We believe the risk of systemic concerns developing in China remains low, though spreading[s] Macro volatility remains volatile until it eases,” Goldman Sachs analysts wrote on Saturday. This, they added, „may require a more concerted easing effort by Chinese policymakers.”

On Friday evening, China’s securities regulator announced a series of reforms designed to boost investment in its capital markets, including encouraging stock purchases to stabilize prices and cutting transaction fees for brokers, while the central bank stepped up protection of the renminbi.

The LPR is partly determined by the credit ratios of China’s biggest banks, which are due to release financial reports for the second quarter this month. The one-year LPR, which was cut by 10 basis points in June, is closely watched because of its relationship with mortgage lending costs.

Analysts at Nomura forecast one-year LPR to cut to 2.35 percent by year-end, and MLF to cut 15 basis points to 2.35 percent.

„However, the real problem for the current growth slowdown is less demand for credit than an insufficient supply of loanable funds,” they wrote. „At some point Beijing may be forced to take additional measures to stem the downward spiral.”

China’s real estate sector, which normally accounts for more than a quarter of economic activity, has been crippled by a liquidity crunch over the past two years following the 2021 default of Evergrande, the world’s most indebted property developer. Last week, Evergrande filed for bankruptcy protection in the United States as part of a lengthy restructuring process.

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