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China Perspectives - Record LPR cut suggests more proactive policy stance

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China Perspectives

China Perspectives - Record LPR cut suggests more proactive policy stance

Feb 27, 2024

  • The larger-than-expected long-end LPR cut comes when China still faces continuous deflationary pressure and low property market investment. The cut was the largest since LPR was made the main loan benchmark rate in 2019. The duration focus (5yr) of the cut suggests a more pro-active monetary policy stance targeting housing market and long-term investment. This suggests that PBoC is taking a step further from the previous more quantitative biased monetary easing
  • Lingering pressure in CPI and PPI has pushed up China’s real interest rate which increasingly deviate from the falling nominal rates since the pandemic. China now has one of the highest real interest rates among major global and Asian economies. This has meant rate cuts have been on the table for some time
  • We think the property market impact of the LPR cut will not be immediately felt as weak price expectation is stickier than in previous cycles and existing homeowners will only see their floating rate mortgage re-pegged next year. As a result, fiscal expansion will remain a key driver for total demand creation. Incrementally more pro-active monetary policy is important to support another year of fiscal expansion, with official national deficit exceeding 3 per cent in our view
  • Latest capital market stabilisation measures and the rate cut have helped China equity to recover from the steep losses in January. A-shares have regained an important long run trend line (20-year MA line, which was rarely breached), suggesting sentiment has stabilised. We would watch for more policy clarity and consistency at the upcoming National People’s Congress in March before turning more determinately upbeat, although we think a bottom has formed. In addition to the traditional GDP, inflation and deficit targets, this year we would also closely follow policy messages around capital markets reform, SOE appraisal system, supports to consumption, and structural reform around technological innovation and creativity
  • In the bond market, we see the curve flattening to continue between 10-30yr as monetary policy turns more accommodative. Short-medium (3-5 year) duration quality carry remains our preferred bond market strategy

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