In a significant move to reinvigorate investor confidence, the Chinese market experienced a robust rally throughout the week following the Beijing government's introduction of a comprehensive set of stimulus measures. Analysts express optimism that these decisions could pave the way for a resurgence in the post-pandemic recovery of the world's second-largest economy. On Tuesday, Pan Gongsheng, the Governor of the People's Bank of China, announced plans for impending rate cuts aimed at enhancing investor sentiment.
Notable among these changes is a 0.5-percentage-point reduction in mortgage rates for existing home loans, which sees the minimum down payment ratio for purchasing second-hand properties decreasing from 25% to 15%. In addition, the interest rate for the seven-day reverse repos will also be adjusted downwards to 1.5% from the previous 1.7%. In a note released on Tuesday, Lynn Song, ING's chief economist for Greater China, highlighted that this reduction in mortgage rates has positively influenced market sentiment, with investors perceiving a previously noted 'lack of high-quality borrowing demand.' Wednesday brought further changes when the People's Bank of China lowered the one-year medium-term loan facility rate to 2% from 2.3% while executing a 300-billion-yuan medium-term lending facility.
Consequently, the MLF balance has now reached 6.878 trillion yuan. This strategic move came on the heels of a previous reduction in the 14-day reverse repo operations, which decreased to 1.85% from 1.95%. In conjunction, the central bank injected a total of 74.5 billion yuan into these repo operations. Song expressed that the newly introduced stimulus measures represent a positive step forward.
'We continue to believe that there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory,' she commented. 'If we also witness a significant fiscal policy push, we could see momentum recovering as we approach the fourth quarter.' However, S&P Global Ratings weighed in on Wednesday, cautioning that the stimulus measures, particularly the mortgage rate cut of 50 basis points, may exert pressure on net interest margins and the overall mortgage quality of lenders.
This concern is especially pertinent for smaller financial institutions. According to Ming Tan, a credit analyst at S&P Global Ratings, 'The steps will test banks' management of funding costs and their underwriting ability, with certain institutions possibly experiencing lowered profitability and deteriorating asset quality.' He added that smaller regional banks, particularly in lower-tier cities, may be more vulnerable due to their exposure to the country's weaker property markets..