April is often seen as a low tide for the economy, a time when various indicators dip to their lowest points before the gradual uptick begins in MayRecent data suggests that this year follows that traditional pattern, showing that many sectors are poised for recovery as we move deeper into the springBy cutting the Loan Prime Rate (LPR) and reducing the minimum mortgage interest rates, it is evident that monetary policy is taking steps towards broadening credit availability, which is essential for economic stimulation.

In April, a resurgence of localized COVID-19 outbreaks in significant urban areas marked a stark reminder of the ongoing challenges faced by the economyAccording to reports from the National Health Commission, by the end of April, 28 provinces across the country had logged new local cases over a 14-day period

Advertisements

Such developments inevitably led to direct adverse impacts on economic activity, pushing the pressure of operational decline to the forefrontKey metrics like industrial production and service sector activity indices showcased year-on-year declines, while consumer demand indices reflected a notable drop in spending capability among households—some categories showing a two-digit percentage decrease in consumer demandThis situation paints a clear picture of how localized infections are constraining consumer behavior, thereby affecting the broader economy.

In response to these outbreaks, local governments implemented stringent measures to limit the dissemination of the virusThese restrictions extended to logistics and transportation sectors, inadvertently stalling productionSurvey data from the Purchasing Managers' Index (PMI) indicated that the supplier delivery time index had plummeted to 37.2% in April, marking a dramatic decline of 9.3 percentage points from the prior month—the lowest recorded since March 2020. Manufacturers faced significant disruptions in logistics, leading to shortages in vital raw materials and essential components, which in turn hampered their ability to sell finished goods and prompted inventory backlogs

Advertisements

Consequently, the industrial production figures reflected a contraction, with the national industrial value added dropping by 2.9% year-on-year and a sequential decline of 7.08%.

However, as we moved into May, there was a discernible improvement in logistics nationallyData from early May indicated that the average freight volume index improved to 86.5, reflecting a 7.6% increase compared to AprilFurthermore, the National Health Commission's mid-May report indicated that only 140 new local COVID-19 cases were logged across all provinces and autonomous regions, a significant drop from previous highs of this outbreakThis bodes well for the steady resumption of economic and social activities as the situation continues to stabilize.

By May 15, 15 out of the 16 districts in Shanghai reported zero cases of the virus in social settings

Advertisements

The city began to gradually reopen businesses starting on May 16. On April 29, a crucial meeting outlined a comprehensive package of policy measures designed to bolster economic growth, underscoring the urgency of implementing new policies to stimulate the economy and suggesting the importance of properly timing interventions.

On May 20, a significant development occurred when the five-year LPR was reduced by 15 basis points, while the one-year rate remained unchangedThis adjustment is notable for two primary reasonsFirstly, it represents the first time that the five-year rate has been adjusted independently—a departure from previous trends where the cuts were often more pronounced in the one-year rateThis is indeed profound as it indicates a focus on the policy challenges within the housing market and a commitment to stabilizing real estate.

The rationale behind lowering the five-year LPR lies in the fact that there has been a considerable gap between corporate borrowing rates and residential mortgage rates, exacerbating the challenges in stabilizing the real estate sector

• U.S. Stock Futures Rise
• The Cost of High Inflation in the U.S.
• The Power Play Behind Saudi Aramco's IPO
• U.S. AI Chip Trajectory
• Downgraded Earnings Forecasts: Market Impact

In recent years, the People's Bank of China has been actively seeking to reduce the cost of corporate financingData from March 2022 revealed that the weighted average rate for new loans was at a historic low of 4.98%, while corporate borrowing costs clocked in at 4.36%. In stark contrast, the average mortgage rate lingered significantly higher at 5.49%, suggesting a substantial room for further reductionsThis disparity between the mortgage and corporate borrowing rates has incentivized banks to lower mortgage rates to stimulate housing demand.

From an economic stabilization standpoint, while the recent cuts in corporate borrowing rates have been modestly successful in reducing financial expenses for firms, they have not sparked the desired surge in loan demand—especially in the realm of medium to long-term corporate borrowingThe stagnation faced in the real estate sales and investment sectors has largely hindered corporate borrowing activities, making the recent reduction in the five-year LPR a timely adjustment aimed directly at addressing this dilemma.

Secondly, this adjustment in the LPR took place independently of a cut in the Medium-Term Lending Facility (MLF) rate, thereby reducing the likelihood of any substantial depreciation pressure on the renminbi