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China set to cut benchmark rate after first GDP contraction on record: analysts

SHANGHAI (Reuters) - China is widely expected to cut its benchmark lending rate on Monday to provide further support for the coronavirus-hit economy, which shrank for the first time on record in the first quarter, a Reuters survey of traders and analysts found.

FILE PHOTO: A businessman walks by Beijing's Central Business District as the spread of the new coronavirus disease (COVID-19) continues in China, April 17, 2020, REUTERS/Thomas Peter/File Photo

All 52 participants in the survey expected a reduction in the Loan Prime Rate (LPR) in its monthly fixing on Monday to lower financing costs for companies as they struggle to get back on their feet after unprecedented economic disruptions.

A cut would be the second to the lending benchmark rate this year. Most new and outstanding loans are based on the LPR.

Forty-six respondents believed the one-year LPR would be reduced by 20 basis points (bps), mimicking a cut in the central bank’s medium-term funding costs this week. Six expected a more modest 10 bps cut to 3.95% from the current 4.05%.

For the five-year LPR, which influences the pricing of mortgages, 21 respondents forecast a 10 bps cut, 24 saw a marginal 5 bps cut and one person said it would not be changed.

Some traders said they would pay more attention to the five-year rate for clues on whether Beijing may ease curbs on the property sector to boost economic growth.

The overwhelmingly high expectations for a cut to the lending benchmark rate came after the People’s Bank of China (PBOC) lowered the interest rate on its medium-term lending facility (MLF) for financial institutions to the lowest level on record this week. That gauge serves as the guide to the LPR.

Bleak economic data on Friday reinforced expectations that Beijing will ramp up policy support in coming months to help keep cash-starved companies afloat until demand recovers.

China’s economy shrank 6.8% in the first quarter from a year earlier, the first contraction since at least 1992 when the government began publishing quarterly records.

Despite some signs of improvement in March as Beijing restarted its economic engines, analysts say a recovery will take time. Analysts in a separate Reuters poll said full-year growth could be the weakest in over 40 years.

“Judging from high frequency economic data and progress of work resumption in April, we believe the central bank will continue its easing stance for the time being despite some signs of loose liquidity in the banking system,” said Jacqueline Rong, senior China economist at BNP Paribas in Beijing.

Rong expects a 20-bps reduction in one-year LPR and a 5-bps to the five-year tenor on Monday.

She also sees another half a percentage point cut to banks’ reserve requirement ratio (RRR), on top of one announced this month, and an additional 10 bps points decline in policy rates in the remainder of the current quarter.

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August 2019, loosely pegging it to the MLF rate.

All 52 responses in the survey were collected from selected participants on a private messaging platform.

Reporting by Steven Bian, Li Hongwei, Hou Xiangming, Wu Fang, Zhang Xiaochong and Andrew Galbraith, Writing by Winni Zhou; Editing by Kim Coghill

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