China trims loan prime rate

China cuts lending benchmark

China appears to be blinking in the face of slowing growth next year, trimming 5 basis points of its 1-year Loan Prime Rate (LPR) to 3.80%, while leaving the 5-year LPR unchanged. Far more loans are based on the 1-year LPR than the 5-year, so the move is a concrete signal that China is moving into supportive monetary policy. That was reinforced by yet another notably weaker than expected yuan fixing versus the US dollar this morning.

Over the weekend S&P moved Evergrande into default joining Fitch, and along with Kaisa, this story, and the wider property sector are not going away anytime soon. Additionally, officials in China said that more work was required on monopolistic behaviour by corporate China, and online brokerages are apparently next in their sights. So, the “shared prosperity” policies are also still fully in play as expected. News that China’s Sinovac vaccine appears to be ineffective against the omicron variant means that China’s Covid-zero policy will keep the gates closed to the outside world for all of 2022.

With all of that in mind, it is no real surprise that China is moving quickly to a targeted supportive monetary policy setting. Challenges remain though and the deluge of articles in the press saying that many China equities are at bargain levels is as big a warning sign of trouble ahead as any. They won’t look so cheap in three months’ time if they’re half of what they are today. In this context, it is unsurprising that the rally in mainland stocks after the LPR cut ran out of steam within minutes, as they joined the rest of Asia in the red.

The weekend has been a steady stream of negative headlines, with the Grinch who stole Christmas probably thinking he won’t be needed this year. Omicron dominated the headlines with a UK study suggesting it was no less vicious than delta. Exploding case numbers in the UK and Western Europe had governments on the continent tightening entry restrictions and the Netherlands has gone into full lockdown. Similar warnings about impending case numbers were made by US officials as well.

If that wasn’t enough, Democrat Senator Joe Manchin appears to have blindsided the White House and his own Congressional caucus by announcing he won’t support President Biden’s USD 2 trillion Build Back Better spending programme. That effectively leaves it dead in the water now and the Biden legislative agenda in disarray. Goldman Sachs has already trimmed next year’s US growth forecast in response.

Of course, a positive headline regarding omicron could hit the wires and temporarily hand-brake turn sentiment once again. With the holidays nearly upon us, liquidity will sharply reduce anyway, exacerbating intra-day moves. Markets this week and next will be for day traders with steely nerves and deep pockets, not for trend followers. As I have repeatedly said, the winner in December is V for Volatility, nothing has changed on that front. Be careful out there.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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