Unexpected Interest Arises After PBOC Cuts Rates Following the Third Plenary Session of the CPC Central Committee

On July 22nd, the People’s Bank of China announced a cut in the market’s 7-day reverse repurchase operation rate from 1.8% to 1.7%. Additionally, the one-year and five-year loan market quoted rates (LPR) were lowered by 10 basis points each to 3.35% and 3.85%, respectively. Reuters reported that China’s rate cut exceeded market expectations, and quoted experts who stated that the People’s Bank of China is cutting rates before the Federal Reserve in the United States, indicating that the Chinese government acknowledges the downward pressure on the economy.

The announcement to lower the LPR by the People’s Bank of China on July 22nd brought the one-year LPR down to 3.35% and the five-year LPR to 3.85%, ending a trend of 10 and 4 months without change, respectively. Since the beginning of the year, the five-year LPR has accumulated a total decrease of 35 basis points.

Furthermore, effective immediately, the open market’s 7-day reverse repurchase operation rate has been adjusted from 1.80% to 1.70%, marking the first adjustment since August 2023.

The People’s Bank of China also announced a phased reduction in the collateral of medium-term lending facilities (MLF) for institutions participating in selling medium to long-term bonds.

The five-year mortgage loan benchmark interest rate was lowered from 3.95% to 3.85%. This marks the second rate cut of the year following a slight decrease in February.

China is facing an unprecedented real estate crisis, sustained weak consumption, and a high youth unemployment rate.

According to data released by the National Bureau of Statistics of China last week, economic growth in China in the second quarter slowed substantially year-on-year, increasing by only 4.7%, below expectations; retail sales in June only grew by 2% year-on-year, and the slowdown of crucial indicators reflects ongoing weak consumption.

Reuters reported that Ben Bennett, Head of Asia-Pacific Investment Strategy at LGIM, Hong Kong, commented on the interesting timing of the rate cut following the Third Plenum, suggesting a potential policy shift in support of growth. The implementation of more support measures remains to be seen.

Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, Shanghai, stated that the People’s Bank of China’s decision to cut rates before the Federal Reserve indicates the government’s recognition of the downward pressure on the Chinese economy.

Gary Ng, Senior Economist at Natixis, France, emphasized that from a fundamental perspective of the Chinese economy, the weak GDP data in the second quarter, especially in an environment of monetary tightening, indeed necessitates a lower interest rate environment.

“Overall, the economic situation is not great, and this trend aligns with the current economic fundamentals. Apparently, the authorities are feeling an urgency to stimulate the economy.”

In the calculation of a business loan amount of 1 million yuan, a 30-year loan term, and equal principal and interest repayment method, the 10 basis point reduction in LPR translates to a monthly saving of 57.3 yuan, with a total saving of 21,000 yuan over 30 years.

On July 22nd, “LPR cut 1 million mortgage 30 years reduce 21,000 yuan (RMB, same below)” trended on social media platforms, sparking discussions and mocking among netizens.

“Seven Cat Free Novel Enjoyment”: A 1 million mortgage over 30 years should be repaid around 1.6 million, what’s the big deal about saving 21,000?

“Universal Dragon 1696”: 21,000/30 years = 700 yuan per year, this tearful benefit is substantial.

“Flower Cat Not Fickle”: First, you have to be able to borrow 1 million, then you have to consider if you can repay it.

“Stiff_Sentimental”: Useless. Those with favorable material conditions have long since paid off their mortgages. For those in need, either they are still repaying loans or cannot afford to buy. No essential changes.