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China's LPR drops amid intensified efforts to bolster economy
  ·  2024-02-21  ·   Source: Xinhua News Agency

China's benchmark lending rate dropped on February 20 as the country has strengthened monetary measures to give the economy a promising start in the first quarter of 2024.

The loan prime rate (LPR), a market-based benchmark lending rate, saw its over-five-year rate, on which lenders base their mortgage rates, come in at 3.95 percent, down from the previous reading of 4.2 percent, according to the National Interbank Funding Center. Meanwhile, the one-year LPR remained unchanged at 3.45 percent.

The reduction in the over-five-year rate was within expectation, but the extent exceeded market expectation, analysts said, noting that the 25-basis-point drop marks the largest in recent years.

As the property sector has yet to completely stabilize, the bigger-than-expected LPR cut sent a positive signal, said Song Xuetao, an analyst at TF Securities.

The previous LPR decline occurred last August when the one-year rate slipped from 3.55 percent to 3.45 percent, while the over-five-year rate was flat at 4.2 percent.

A lower LPR is expected to shore up the credit and property markets, reduce the financial costs of businesses and individuals, and contribute to a steady economic recovery at the beginning of 2024.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company Limited, said the property sector will be consolidated as there will be less mortgage interest payments for home buyers, and the financing demand of enterprises will also be stimulated.

The Chinese economy has maintained its upward trend since the beginning of the year with forecast-beating credit and social financing data in January and robust holiday consumption during the Spring Festival period.

However, the purchasing managers' index for the manufacturing sector was still below the boom-or-bust line of 50 and consumer prices were at a low level, which indicated relatively weak expectations and inadequate demand.

In response, the central bank has recently adopted multiple measures recently to support economic recovery and boost confidence.

The amount of cash reserves that lenders need to set aside was lowered, and the re-lending and re-discount interest rates for the rural sector and small businesses were reduced. Another 500 billion yuan (about $70.36 billion) of funds have been pumped into the market through the medium-term lending facility.

The strengthened monetary measures will offer more targeted and solid support for the real economy, said Bruce Pang, the Greater China chief economist of JLL, a real estate and investment management services firm.

Looking forward, there is still room for policy maneuver as major banks have lowered deposit interest rates four times since 2022, and the financing costs could be further reduced to support the economy.

The latest decline in the LPR has bolstered market confidence, and the implementation of more effective pro-growth policies in the pipeline will further solidify the economy's strong start this year, according to analysts.


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