Surging 'D Fear'... China Lowers Benchmark Interest Rate for the First Time in 10 Months (Comprehensive)

Fearing "deflation (price decline amid economic recession)," China has abruptly cut its benchmark interest rates. The move aims to revive the fading economic spark by expanding liquidity supply in the market, but experts predict the policy's effect will be limited.

On the 20th (local time), the People's Bank of China, the country's central bank, lowered the 1-year Loan Prime Rate (LPR) to 3.55% and the 5-year LPR to 4.2%, each by 0.1 percentage points. This is the first time in 10 months that the People's Bank has cut the LPR. The LPR serves as the de facto benchmark interest rate, based on loans to the best customers of 18 major Chinese commercial banks. With this cut, the monthly payment on a 1 million yuan loan repaid in equal installments over 20 years will decrease by about 650 yuan (approximately 116,155 KRW) annually.

China's recent benchmark rate cut was anticipated. As concerns grew that the economy would enter a recession phase due to a slowdown in recovery despite last year's year-end reopening (resumption of economic activities), the market expected a rate cut. China's Consumer Price Index (CPI) growth rate in May declined compared to the previous month, and retail sales and industrial production also slowed in the same month. Exports in May decreased by 7.5% compared to a year earlier. Amid this, the State Council of China announced on the 16th that it would soon release a policy package containing economic stimulus measures.

Wang Qing, Chief Macro Analyst at Dongfang Jincheng, said, "Currently, corporate loan interest rates are at historically low levels, significantly lower than mortgage rates." He added, "Considering the recent renewed weakness in the real estate market, the 5-year and longer LPR could be lowered further."

Earlier, a Reuters survey of 32 experts found that all respondents expected the People's Bank of China to cut both the 1-year and 5-year LPRs. However, the market assessed that the cut in the 5-year LPR was smaller than initially expected due to concerns that it might overheat the real estate market.

Previously, on the 15th, the People's Bank lowered the 1-year Medium-term Lending Facility (MLF) rate for the first time in 10 months, and on the 13th, it supplied 2 billion yuan of liquidity to the market through a 7-day reverse repurchase agreement (reverse repo), lowering the applied rate by 0.1 percentage points compared to before.

However, external experts predict that this benchmark rate cut will unlikely drive a rebound in China's economic recovery. Julian Evans-Pritchard, Chief China Economist at Capital Economics, stated, "This rate cut will provide some support to economic activity by lowering interest on existing loans as well as the cost of new loans." However, he analyzed, "Given the current slowdown in loan demand, the likelihood of a rapid expansion in lending is low." Sing Jiaofeng, Senior China Strategist at ANZ Bank, forecasted, "Government policies will lead only to a soft landing of the existing economy rather than a renewed economic stimulus."

In fact, global investment banks have been lowering their growth forecasts for China this year one after another. JPMorgan in the U.S. lowered its growth forecast from 5.9% to 5.5%. Swiss UBS adjusted it down from 5.7% to 5.2%, and Japan's Nomura Holdings cut it from 5.5% to 5.1%. The UK’s Standard Chartered projected China's growth rate at 5.4% this year, down 0.4 percentage points from the previous forecast of 5.8%.

Lu Ting, Economist at Nomura Holdings, predicted, "With declining corporate confidence, negative sentiment, a fiscal cliff caused by a collapse in real estate sales, limited policy tools, delays and conflicts in decision-making, economic stimulus measures may fail to reverse the situation."

This content was produced with the assistance of AI translation services.