More monetary and fiscal stimulus looks imminent, as authorities pursue economic stability
China’s interest rate cut is expected to encourage lending throughout the economy, but to what extent this will boost demand remains to be seen. The real estate sector will likely be the first to benefit. Lower rates, the prospect of further monetary easing, and the government’s determination not to let thousands of building projects fail will ease the huge funding pressure the sector is facing. MNCs involved in the property market should see their suppliers, customers, and business partners benefit from more breathing room in the next few months. If the rate cuts work, and the overall economic situation stabilizes and recovers, then business and consumer confidence could bounce back and drive higher growth in manufacturing and exports. All this depends, however, on how successfully China can contain COVID-19 outbreaks this year without tremendously disrupting normal economic activities.
- On January 17, The People’s Bank of China (PBoC) lowered the rate on one-year medium-term lending facility (MLF) loans by 10 basis points to 2.85%, from 2.95%.
- This marks the first time the PBoC has cut the one-year MLF rate since April 2020, not long after the pandemic started.
- The move came after the PBoC lowered the one-year loan prime rate to 3.8% just a month ago, from 3.85%.
- The market is now watching closely whether the PBoC will soon cut its five-year loan prime rate (LPR), another benchmark rate that has a bigger impact on residential mortgage rates.
The cut to MLF rates was a surprising move, suggesting the central bank is worried about downward pressure on China’s economy and a pattern of shrinking demand that began in the fourth quarter of last year. What’s more concerning is that this downward pressure is unlikely to go away any time soon, given sporadic COVID-19 outbreaks nationwide and an ongoing, painful deleveraging process across the troubled real estate sector. As a result, the PBoC felt it had to act to prevent the economy from sinking further. Once the bazooka starts to fire, it’s not going to stop soon. We’re anticipating several more rate cuts from the PBoC in H1 2022, and possibly more policy easing on the fiscal side. The economic buzzword for China this year is “stability.” Authorities will do everything they can to steady the ship.
At FrontierView, our mission is to help our clients grow and win in their most important markets. We are excited to share that FiscalNote, a leading technology provider of global policy and market intelligence has acquired FrontierView. We will continue to cover issues and topics driving growth in your business, while fully leveraging FiscalNote’s portfolio within the global risk, ESG, and geopolitical advisory product suite.
Subscribe to our weekly newsletter The Lens published by our Global Economics and Scenarios team which highlights high-impact developments and trends for business professionals. For full access to our offerings, start your free trial today and download our complimentary mobile app, available on iOS and Android.