“SHOCKING: China’s Secret Plan to Save Its Economy – You Won’t Believe What They Did!”

China took action on Monday to boost credit demand by reducing its one-year benchmark lending rate, although it surprised the markets by keeping the five-year rate unchanged, a decision influenced by concerns about the depreciation of the yuan.

The economic recovery in the world’s second-largest economy has faced headwinds, including a worsening property market, sluggish consumer spending, and declining credit growth. These challenges have prompted calls for further policy stimulus from Chinese authorities.

However, experts suggest that the yuan’s ongoing depreciation limits China’s ability to implement more aggressive monetary easing. A significant reduction in China’s yield differentials compared to other major economies could potentially trigger a selloff of the yuan and capital flight.

The one-year loan prime rate (LPR) was lowered by 10 basis points, falling from 3.55% to 3.45%, while the five-year LPR remained steady at 4.20%.

Masayuki Kichikawa, Chief Macro Strategist at Sumitomo Mitsui DS Asset Management, speculated, “Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan. Chinese authorities care about currency market stability.”

The majority of new and existing loans in China are linked to the one-year LPR, while the five-year rate has an impact on mortgage pricing. China had previously lowered both LPRs in June as part of its economic stimulus efforts.

In early trading, the onshore yuan eased to 7.3078 per dollar, compared to its previous close at 7.2855. This coincided with declines in the benchmark Shanghai Composite index (.SSEC) and the blue-chip CSI 300 index (.CSI300).

The yuan has struggled against the dollar this year, depreciating by nearly 6%, making it one of the weakest-performing Asian currencies.

The decision to reduce the one-year LPR followed the unexpected reduction of the medium-term policy rate by the People’s Bank of China (PBOC) the previous week. The medium-term lending facility (MLF) rate, which guides the LPR, is closely monitored by the markets as an indicator of potential future changes to lending benchmarks.

China’s central bank has also committed to maintaining reasonably ample liquidity and employing “precise and forceful” policy measures to support the economic recovery, especially considering the emerging challenges, according to its second-quarter monetary policy implementation report.

The decision to maintain the five-year rate unchanged took many traders and analysts by surprise. Some had expected deeper cuts to the benchmarks, given the difficulties facing the property sector and the rising default risks among some developers.

Ken Cheung, Chief Asian FX Strategist at Mizuho Bank, remarked, “We interpret the status quo of the five-year LPR was a signal that the Chinese banks are reluctant to cut rates at the expense of rate differential margin. It flagged a problem on the effectiveness of PBOC’s policy guidance pass-through into the market, and the Chinese authorities may be lacking effective tools to stimulate the property sector and economy via monetary easing.”

Cheung added that this unexpected outcome could have a “negative impact on China’s growth outlook and the yuan exchange rate.”

In a statement on Sunday, the central bank stated its intention to optimize credit policies for the property sector while coordinating financial support to address local government debt issues.

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