The People’s Bank of China (PBOC) unveiled a modest reduction in its one-year loan prime rate, trimming it by 10 basis points from 3.55% to 3.45%. However, the central bank opted to maintain five-year rates, which play a significant role in mortgages, unchanged at 4.20%.
This decision has left many disappointed who were anticipating a more substantial 15-basis-point cut for both rates. The move comes amid China’s grappling with a deepening crisis in its property sector, which is exerting a destabilizing influence on the world’s second-largest economy.
The USD/CNY pair experienced a 0.7% drop to 7.2305, as the yuan staged a recovery following its earlier crossing of the pivotal 7.3 level, coming just below its highest point since August 2022. The less-than-anticipated rate cut contributed to the yuan’s resurgence.
The Chinese central bank finds itself in a delicate position, as the economy necessitates stimulus. However, the downward pressure on the yuan imposes limitations on substantial monetary easing. The risk of a wider divergence in China’s yield differentials leading to capital flight also factors into the bank’s considerations.
“Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment,” noted analysts at ING in a statement. They further emphasized that this sentiment shift is especially pronounced following the Federal Reserve’s minutes, which have had limited implications for central bank expectations, while the global economic calendar remains relatively light.
