China announces reduction in base lending rate

China cut its benchmark lending rate as widely expected at its monthly rate setting on October 21, after cutting other policy rates last month, as part of a package of stimulus measures to revive the economy.

The one-year loan prime rate (LPR) was cut by 0.25 percentage points from 3.35% to 3.10%, while the five-year LPR was cut by the same amount from 3.85% to 3.6%. These rates were last adjusted downward in July. Most new and existing loans in China are based on the one-year LPR, while the five-year LPR affects mortgage rates.

Speaking at a financial forum last week, People's Bank of China (PBoC) Governor Pan Gongsheng said lending rates would be cut by 0.20-0.25 percentage points on October 21.

Previously, on September 24, the PBoC announced a reduction in the reserve requirement ratio for commercial banks by 0.5 percentage points and the 7-day reverse repo rate by 0.2 percentage points.

The move kicks off the most aggressive stimulus package since the COVID-19 pandemic, including measures to support the struggling property sector and boost consumption. The PBoC also cut the interest rate on its medium-term lending facility by 0.3 percentage points last month.

Since the measures were announced on September 24, the CSI300 Index has broken several intraday volatility records and is up more than 14% overall. The yuan has fallen 1% against the dollar over the same period.

However, stock markets have been choppy in recent sessions as initial euphoria gave way to concerns about whether these policy support measures will be big enough to revive growth in the world's second-largest economy.

China’s economic growth was slightly better than expected in the third quarter, new data showed, although property investment fell more than 10% in the January-September period. Retail sales and industrial output accelerated in September.

Speaking at a press conference over the weekend, Chinese officials expressed confidence that the country's economy could meet the government's full-year growth target of around 5 percent, while signaling further cuts in banks' reserve requirement ratios later this year.