The People's Bank of China unveiled the latest adjustments to the Loan Prime Rate (LPR) on October 21, 2024. The 1-year LPR was reduced to 3.10%, while the 5-year and longer-term LPR was lowered to 3.60%. Both rates experienced a decline of 25 basis points compared to the previous month, marking the most substantial decrease since the LPR reform in 2019 and the third adjustment within the current year.

Current Economic Landscape

The Chinese economy in 2024 encounters various challenges, as indicated by recent data from the National Bureau of Statistics:

• Gross Domestic Product (GDP) Growth: In the third quarter of 2024, China's GDP growth rate stood at 4.6%. With a year-on-year growth of 4.8% in the initial three quarters, this reveals a steady growth trajectory in the third quarter, albeit slightly slower compared to 5.3% in the first quarter and 4.7% in the second quarter.
• Consumer Consumption Growth: Over the first three quarters of 2024, China witnessed a 3.3% year-on-year increase in total retail sales of consumer goods, totaling 3.53564 trillion yuan. In September, total retail sales reached 4.1112 trillion yuan, up by 3.2% year-on-year. This marked an acceleration by 1.1 percentage points from the preceding month and represented the highest growth rate since June.
• Real Estate Market: The national real estate market experienced a 17.1% year-on-year decrease in sales area during the initial three quarters of 2024, with residential sales area declining by 19.2% and new construction projects decreasing by 22.2%.

Continuation of Rate Reduction Measures

Given this context, the central bank opted to persist in lowering the LPR to mitigate financing costs and foster market vitality in support of growth and consumption stabilization. The central bank had previously reduced the policy rate on September 27, lowering the 7-day reverse repurchase rate by 20 basis points. This laid the groundwork for the subsequent LPR adjustment. Furthermore, a series of incremental policies, including cuts in reserve requirement ratios, were implemented to further reduce loan rates for enterprises and residents, thereby bolstering the real economy.

Analysts posit that the LPR reduction aligns with the prevailing macroeconomic policy orientation and acts as a pivotal conduit for the central bank's concerted efforts towards impactful rate adjustments for the real economy. Wang Qing, Chief Macro Analyst at Orient Securities, highlighted the gradual introduction of incremental policies as a concerted macroeconomic strategy aimed at stabilizing growth. The LPR reduction is anticipated to contribute to real estate market stabilization, offering essential backing for the realization of annual economic and social development objectives.

Impact of Rate Cuts

• Real Estate Market: The reduction in the 5-year and longer-term LPR plays a crucial role in stabilizing the real estate market and promoting sustainable development in housing price formation mechanisms. Data from the China Banking and Insurance Regulatory Commission suggests that over 7 million existing housing loans will be impacted by the rate adjustment, benefiting a substantial number of borrowers with reduced interest rates and alleviating household repayment pressures.
• Consumption and Business Investment: Projections from the Chinese Academy of Social Sciences anticipate that the rate cut will propel consumption growth in 2024 to exceed 6%, particularly in sectors such as household appliances and automobiles. Lowering the rate will also trim financing costs for businesses. Forecasts indicate that manufacturing investment in 2024 is poised to expand by 8%, a 2-percentage point increase from 2023. Moreover, investment growth in the technology industry is expected to reach 10%, supporting innovation-driven development.
• Stock Market: Rate cuts generally bode well for the stock market, as they can reduce corporate borrowing costs, augment profitability, and potentially bolster stock prices. Additionally, a rate cut may attract more capital into the stock market, considering the enhanced allure of stocks relative to fixed-income investments due to declining market rates.

Moreover, the LPR adjustment aligns with the recent decrease in bank deposit rates. Since October 18, China's major banks collectively lowered deposit rates, marking the sixth reduction since September 2022 and further diminishing banks' funding costs. Analysts suggest that while the central bank may adopt a stance of monitoring policy effects in the short term, given the existing economic conditions and global market dynamics, there remains potential for LPR adjustments in 2025. Looking ahead, the central bank's monetary policy is anticipated to maintain a moderately accommodative stance to bolster stable economic growth.

Market Response

The announcement of the rate cut policy elicited a positive response in the A-share market, with the Shanghai Composite Index climbing by 1.5% at the onset on October 21. Notably, the technology and financial sectors demonstrated robust performance, with financial stocks rising by approximately 2.3% and technology stocks by around 3.1%. Several securities firms hold an optimistic outlook on the future market trajectory, with Zhejiang Securities foreseeing a "daily rebound - daily oscillation" trend in the short term. Guotai Junan Securities also highlighted the financial and technology sectors as primary investment focal points moving forward.