September 20, 2019 / 5:33 AM / 3 months ago

Breakingviews - Beijing’s monetary easing path is a conflicted one

An investor watches a market board indicating the Chinese stock market index in a trading house in central Beijing November 3, 2008. China stocks were still down slightly Monday after a third rate cut in six weeks and a barrage of initiatives to shore up banks and prime-pump sputtering economies, after world stock markets had their worst month ever falling 20 percent in October alone. A measure of Chinese manufacturing activity released Monday showed factory output shrank sharply in October in the face of waning orders, while officials pledged further steps to boost domestic demand to keep the economy from slowing too much. REUTERS/David Gray

HONG KONG (Reuters Breakingviews) - The first cuts can be the shallowest. Beijing trimmed its newly reformed one-year benchmark lending rate to 4.2%. Policymakers want to boost slowing growth, but without fueling a property or credit bubble. The result is another half-step towards loosening that will disappoint those hoping for a quick stimulus.

China’s central bank said last month it would improve the mechanism used to establish the Loan Prime Rate, a move that paves the way towards lower borrowing costs. Friday marked only the second monthly reading of the revamped number, based on what Chinese commercial banks charge clients. In the end, there was a modest reduction of 5 basis points for the one-year rate, while the five-year level was unchanged at 4.85%.

Traders are by now accustomed to baby steps towards monetary easing in China. Beijing is in its second year of loosening to rev up a cooler economy. But policymakers are awkwardly attempting to juggle that with curbing financial excesses, particularly in the property market, where new home prices continue to rise at nearly 9% a year. Officials are also loathe to reverse a years-long drive to deleverage the economy and crimp the shadow-banking sector.

The country’s lenders may be a worry too. A 50-basis point cut to the benchmark rate this year could slash their earnings by 15%, according to Houze Song of the Paulson Institute, a think tank.

In the end, it’s messy compromise that only partly matches the more straightforward rate-cutting seen in other emerging markets. Beijing may be lowering borrowing costs, but it is also attaching special rules to mortgage lending rates, for instance. That might change if officials gain more confidence in their new rate or the economy cools further later this year. For now, those pining for a more combative response from Beijing have longer to wait.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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