China is expected to cut benchmark lending rates on Monday as it battles to offset the drag on growth of Covid lockdowns, a property crisis, and the worst heatwave since 1961.
Some 25 out of 30 respondents in a snap poll predicted a 10-basis-point reduction to the one-year loan prime rate (LPR), which banks normally charge their best clients.
All 30 participants expected a cut to the five-year tenor, with 27, or 90% of them, forecasting a reduction larger than 10 bps. Among them, 15 traders and analysts predicted a 15 bps cut, 10 forecast a 20 bps cut, and the remaining two tipped a 25 bps reduction.
Most new and outstanding loans in China are based on the one-year LPR, which now stands at 3.7% after a reduction in January. The five-year rate, which was last lowered in May, influences the pricing of home mortgages and is now at 4.45%.
The market consensus of LPR cuts this month comes after the PBOC unexpectedly lowered two key interest rates early this week, for the second time this year, to try to revive credit demand in an economy that’s battling Covid lockdowns, a property crisis, and the worst heatwave since 1961.
LPR Cuts Next Week
“We think this may translate to more transmission of easing into the real economy, via potential LPR cuts next week,” said chief China economist at NatWest Peiqian Liu. “We expect the five-year LPR to be lowered by 15 basis points, with the one-year LPR to be lowered by 10 bps, as banks step up to support the demand for mortgage loans.”
The dovish tilt in PBOC’s monetary policy stance came after a slew of key gauges including credit lending data and activity indicators showed the economy unexpectedly slowed in July.
The loss of growth momentum has raised the challenge that policymakers face amid mounting headwinds including a resurgence of local Covid cases, inflationary pressures, the slowing global economy – and now a record-breaking heatwave.
Policy insiders and analysts said the PBOC is set to take more easing steps, though it faces limited room to manoeuvre due to worries over rising inflation and capital flight.
National Drought Alert, Battle to Save Crops
China issued its first national drought alert of the year late on Thursday as authorities battle forest fires and mobilise specialist teams to protect crops from scorching temperatures across the Yangtze river basin.
The national ‘yellow alert’ comes after regions from Sichuan in the southwest to Shanghai in the Yangtze delta have experienced weeks of extreme heat, with government officials repeatedly citing global climate change as the cause. The alert is two notches short of the most serious warning on Beijing’s scale.
In one of the Yangtze’s important flood basins in central China’s Jiangxi province, the Poyang Lake has now shrunk to a quarter of its normal size for this time of year, state news agency Xinhua said on Thursday.
As many as 66 rivers across 34 counties in the southwestern region of Chongqing have dried up, state broadcaster CCTV said.
Rainfall in Chongqing this year is down 60% compared to the seasonal norm, and the soil in several districts is severely short of moisture, CCTV said, citing local government data.
The district of Beibei, north of Chongqing’s urban centre, saw temperatures hit 45 degrees Celsius (113 degrees Fahrenheit) on Thursday, according to China’s weather bureau.
Chongqing accounted for six of the 10 hottest locations in the country on Friday morning, with temperatures in the district of Bishan already approaching 39 degrees Celsius. Shanghai was already at 37 degrees.
The Chongqing region’s infrastructure and emergency services have come under increasing strain, with firefighters on high alert as mountain and forest blazes erupted across the region. State media also reported an increase in cases of heatstroke.
The gas utility in the district of Fuling also told customers on Friday that they would cut off supplies until further notice as they deal with “serious safety hazards”.
The Chongqing agricultural bureau has also set up expert teams to protect vulnerable crops and expand planting to compensate for losses ahead of the autumn harvest.
The water resources ministry has instructed drought-hit agricultural regions to draw up rotas determining who can access supplies at any particular time, to ensure they do not run out.
According to data from China’s emergency ministry late on Thursday, high temperatures in July alone caused direct economic losses of 2.73 billion yuan ($400 million), affecting 5.5 million people.
China’s National Meteorological Centre renewed its high-temperature red alert on Friday – the 30th consecutive day it has issued alerts, it said via Weibo. State forecasters also predicted that the current heatwave would only start to abate on August 26.
The weather agency said in its daily bulletin that 4.5 million square kilometres of territory had now experienced temperatures of 35C or more over the past month – nearly half the country’s total area – with more than 200 weather stations recording record highs.
Power Curbs Shutter Zinc Smelting
Power restrictions caused by the heatwave have shuttered at least 500,000 tonnes per year of zinc smelting capacity, consultancy CRU Group said on Friday, with production losses expected to reach 5,000-6,000 tonnes a week.
China‘s southwestern Sichuan province ordered industrial plants to suspend production from Monday August 15 to Saturday August 20 to prioritise residential power supply amid its worst heatwave in 60 years.
All zinc smelters in Sichuan halted production early this week, and a small smelter based in neighbouring Hunan province also stopped operations in the following days, said Dina Yu, a zinc and lead analyst at consultancy CRU Group.
Total capacity affected by the outages is at least 500,000 tonnes per year, she said, and follows deeper production cuts in Europe due to sky-high energy prices.
Earlier this week, Trafigura’s Nyrstar said it would put its zinc smelting operations at Budel in the Netherlands on care and maintenance from September 1. The Belgian company had already cut output by up to 50% at its three European zinc smelters.
The news pushed the three-month zinc contract on the London Metal Exchange to a two-month peak at $3,819 a tonne on Tuesday.
China is usually a net importer of the metal, but earlier this year turned net exporter as premiums overseas were attractive.
The outages in Sichuan are only a small percentage of the country’s near 7 million tonnes capacity, and are expected to be temporary, said Yu.
Sichuan produced 350,000 tonnes of refined zinc in July, accounting for 8.6% of a total 408,000 tonnes produced that month, according to state-backed research house Antaike.
- Reuters with additional editing by Jim Pollard