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Following the earlier-than-expected cuts to MLF rate and 7-day reverse repo rate, China’s benchmark lending rate was also lowered on Monday, with the one-year LPR cut by 10 bps but 5-year LPR was surprisingly kept unchanged.
The latest LPR cuts are confusing for the market and the market was disappointed by the continued slow pace of the policy response, JPMorgan said in a note.
The move may be a reaction to the mainland authorities’ concern over the NIMs of domestic banks, it said. The PBOC said in a policy report last week that banks’ NIM should be maintained at a reasonable level to ensure continued loan generation and to manage financial risks, especially as local banks have limited access to capital replenishment in the current market conditions.
Mainland banks may also be preparing to refinance their mortgage loan funding sources at lower rates, hence their preference to keep the 5-year LPR unchanged, the broker said.
On the macro front, the real estate sector remains the biggest economic headwind and the stalling property market since April has worsened amid financial difficulties for Country Garden and spillover effects from shadow banks and local government financing vehicles (LGFVs), it said.
The broker downgraded its base case forecast for the sector from “weak-form of stabilization” to “double-dip” and it expected mainland property investment to decline by 8.2% year over year in 2023, new home sales to drop by 10%, new home construction to plummet by 25%, and land sales to shrink by 20%.
JPM expected further policy easing to be triggered by weaker macro and property market activity. On the monetary policy front, it expects a 25 bps cut to RRR in the third quarter to support the issuance of over 1 trillion of local government bonds in Aug – Sept.
The broker concluded that there should be further property market easing in the coming weeks, such as a relaxation of mortgage policy and purchase restrictions, even if the risk is that it will be too weak.
JPM’s base case forecast predicts a pick-up in Chinese economic activity in Aug – Sept, with downside risks including policy efforts remaining modest and intensifying spillover effects from housing market adjustments.