China: Further targeted, piecemeal easing is on the cards – ABN AMRO

Arjen van Dijkhuizen, Senior Economist at ABN AMRO, notes that Chinese banks unexpectedly cut the 1-year loan prime rate by 5bps, to 3.80%, for the first time since the initial covid-19 shock in early 2020.

Key quotes

"This will imply a marginal reduction in funding costs for Chinese corporates, as the 1-year loan prime rate functions as a benchmark for the bulk of corporate loans. The 5-year loan prime rate – a benchmark for mortgage rates – was left unchanged, at 4.65%."

"This mini cut fits within our expectation of a further piecemeal policy easing to stabilise growth. Given remaining risks from real estate and covid-19 policy/omicron, policy inaction would mean that full-year growth in 2022 would fall below Beijing’s preferred trajectory."

"We expect further targeted mini cuts of 1-year loan prime rate and some other policy interest rates in early 2022 and have pencilled in another 50bp RRR cut for next year as well. We also expect Beijing to take further measures to contain the drags from real estate."