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China is expected to slash two core lending rates this year as pressure mounts on policymakers and banks to reverse a slowdown in the world’s second-largest economy and revive weak demand.

The People’s Bank of China is set to announce cuts to its one-year and five-year prime lending rates at its monthly meeting on Monday after unexpectedly cutting interest rates on closely related medium-term loans, which will affect borrowing costs for businesses and households. Term financing rates for last week.

Policymakers in Beijing have grappled with a host of challenges since the lifting of virus restrictions at the start of the year, including a slowing property sector, weak exports, record youth unemployment and price deflation amid weakening consumer confidence.

In a statement released on Sunday, the People’s Bank of China urged banks to increase lending to businesses to boost economic growth and stimulate consumption. The statement was released alongside China’s financial and securities regulators, which met on Friday to discuss China’s “tortuous” economic recovery.

Most economists surveyed by Bloomberg expect the one-year LPR underpinning mortgage lending to be cut by 15 basis points, the most since January 2022. A cut similar to the five-year rate would be the biggest in a year. The current LPR interest rates are 3.55% and 4.2%, respectively.

Economists surveyed unanimously expect a cut in the LPR, which typically follows a reduction in lending facilities in the medium term. The MLF rate, which manages liquidity in the banking sector, is now at 2.5%, the lowest since it was introduced in 2014, and was cut last week.

Despite months of disappointing economic data, Beijing has yet to roll out major stimulus measures, with consumer prices slipping into deflationary territory in July and rising just 0.8% in the second quarter from the previous three months.

But this month, real estate developer Country Garden and savings products linked to investment group Zhongzhi failed to make bond payments, adding to observers’ vigilance.

“We believe the risk of systemic concerns in China remains low, but spreads are likely to remain volatile until macro volatility subsides,” Goldman Sachs analysts wrote on Saturday, adding that this “may require a more coordinated approach by China.” Unanimous easing measures “policy makers”.

Late on Friday, China’s securities regulator announced a series of reforms aimed at boosting investment in capital markets, including encouraging share buybacks to stabilize prices and reducing transaction fees for brokerages.

The LPR is determined in part by China’s largest banks, which are due to release their second-quarter financial reports this month. The one-year LPR, which was cut by 10 basis points in June, has been closely watched for its relationship to mortgage costs.

Analysts at Nomura Securities expect the one-year LPR to be further cut to 2.35% and the MLF to be cut by 15 basis points to 2.35% by the end of this year.

“However, the real problem with the current sluggish growth is subdued credit demand, not insufficient supply of loanable funds,” they wrote. “At some point, Beijing may be forced to do more to stem the economic downturn.”

China’s real estate sector, which normally drives more than a quarter of economic activity, has been paralyzed by a liquidity crisis over the past two years after Evergrande Group, the world’s most indebted property developer, defaulted in 2021. Last week, Evergrande filed for bankruptcy protection in the United States as part of a long-term restructuring.

Additional reporting by Eleanor Olcott in Hong Kong


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