SHANGHAI: The yuan steadied after initially slumping to its weakest in three months in early trade on Tuesday, following China’s larger than expected cut to a benchmark reference rate for mortgages to help revive the property market.
The five-year loan prime rate (LPR) was lowered by 25 basis points to 3.95% from 4.20% previously, the largest such cut since China revamped its loan pricing mechanism in 2019. The one-year LPR was left unchanged at 3.45%.
The bigger-than-expected cut may reflect urgency to entice buyers given the recent lacklustre housing sales data but this alone is unlikely to mark a turnaround in the housing market, said Alex Loo, macro strategist at TD Securities.
“We suspect any positive boost to the yuan from today’s move may quickly fade as investors remain cognizant of the problems plaguing the property sector,” Loo said.
The latest rate cut adds to a string of policies deployed by Beijing over the past year to help revive the property sector, which accounts for a quarter of China’s GDP.
China’s yuan slips on resurgent dollar
The asymmetric 5-year LPR cut indicates that the stimulus is more target-based, alleviating concerns over monetary divergence between the US Federal Reserve and China’s central bank, said Ken Cheung, chief Asian FX strategist at Mizuho.
“We doubt that cheaper financing costs is the only ingredient to revive the residential property sector,” said Maybank analysts, adding that a stronger economic recovery would be better for the currency and asset prices in the medium term.
Prior to the market’s opening, the People’s Bank of China(PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1068 per US dollar, 36 pips weaker than the previous fix 7.1032.
The spot yuan opened at 7.1930 per dollar and was changing hands at 7.1982 at midday, only 5 pips firmer than the previous late session close.
The yuan touched its lowest since Nov. 20, 2023 in early trade on Tuesday.
The global dollar index rose to 104.386 from the previous close of 104.291.
The offshore yuan was trading 98 pips weaker than the onshore spot at 7.208 per dollar.
