China began cutting its benchmark annual lending rate on Monday as authorities sought to step up efforts to stimulate credit demand, but the move surprised markets as China kept its five-year rate unchanged amid wider concerns about its currency. rapidly weakening.
The world's second-largest economy's recovery has begun to lose momentum as a worsening real estate slump, weak consumer spending, and sluggish credit growth prompt policymakers to ramp up economic stimulus.
However, downward pressure on the yuan means Beijing has limited room for deeper monetary easing, analysts say. This is because a further widening of the gap in China's yield differential with other major economies could trigger yuan selling and capital flows.
The one-year prime lending rate (LPR) was lowered by 10 basis points to 3.45% from 3.55% previously, while the five-year LPR rate was left at 4.20%.
In a survey by Reuters of 35 market observers, all participants predicted a reduction to both rates. The 10 basis point reduction in annual rates was smaller than the 15 basis point cut expected by most survey respondents.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year LPR rate influences property pricing. China cut both LPRs in June to boost the economy.
The yuan has lost almost 6% against the US dollar so far this year and is one of the worst performing Asian currencies.
The cut in the one-year LPR comes after the People's Bank of China (PBOC) suddenly lowered its medium-term policy rate last week.
China's central bank also pledged to maintain reasonable liquidity and "appropriate and effective" policies to support economic recovery, amid heightened concerns.
But the steady five-year tenor surprised many traders and analysts, with some expecting the property sector to
The central bank said it will optimize credit policy for the real estate sector, while coordinating financial support to resolve local government debt problems, it said in a statement on Sunday.
