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22 Oct 2024

Econ Digest

The PBOC cuts its one-year and five-year LPRs to record lows

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  • The People’s Bank of China (PBOC) has lowered its loan prime rates (LPRs) by 0.25%. The one-year LPR (a benchmark that banks use to set short-term lending rates) was cut to 3.1% p.a., while the five-year LPR (a benchmark used to set long-term lending rates such as mortgages) was reduced to 3.6% p.a. This move was widely expected following the previous LPR cut in July 2024 and in line with the reduction in the seven-day reverse repo rate in September 2024.
  • The LPR cut is part of China’s economic stimulus package. However, the main economic impact will still depend on funds from fiscal measures, which are expected to become clearer between late October and early November 2024. Despite the previous LPR reduction in July 2024, loan growth continued to decline, from 8.7%YoY in July to 8.1%YoY in September 2024.
  • For the rest of 2024, the PBOC is likely to further reduce the reserve requirement ratio (RRR) for commercial banks by 0.25-0.50%, according to the statement of the PBOC’s governor. Additionally, Chinese authorities plan to issue special long-term government bonds worth CNY1-2 trillion to bolster domestic spending through trade-in schemes and address local government debt issues.
  • China’s economy is expected to grow at an accelerated pace in 4Q-2024 as compared to 3Q-2024, driven by these stimulus measures. However, it may be insufficient to drive the 2024 GDP to reach the government’s growth target of 5.0%, as the Chinese economy would need to grow by 5.3-5.4% YoY in 4Q-2024 to meet this goal.

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Econ Digest