By Chinese stocks took a hit on Monday as China’s central bank, the People’s Bank of China, made smaller changes than expected to interest rates. This move dashed hopes of a much-needed stimulus for the world’s second largest economy.
The one-year loan prime rate (LPR) was reduced by 0.1 percentage point to 3.45%, while the five-year rate remained unchanged at 4.2%. Economists had anticipated a 0.15 percentage point cut for both rates. This underwhelming announcement by the PBOC suggests that larger rate cuts necessary to revive credit demand are unlikely. The prospect of greater fiscal support becomes crucial for hopes of an economic turnaround fueled by stimulus.
Of note, the five-year loan prime rate serves as the benchmark for mortgages in China. The absence of a rate cut disappointed investors who were hoping for a boost to the real estate sector, especially as Country Garden Holdings, one of the country’s largest property developers, faces significant liquidity issues.
As a result, stocks in China suffered, with Hong Kong’s Hang Seng Index dropping 1.8% and mainland markets also experiencing declines. In mixed Asian trading, they emerged as the biggest losers, whereas Japan’s Nikkei 225 managed to gain 0.4%.
This disappointing stimulus outcome further raises doubts about China’s ability to restore its economic growth to pre-pandemic levels. UBS economists, led by Tao Wang, have even revised their 2023 growth forecast for China’s gross domestic product down to 4.8% from the previous estimate of 5.2%.
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