(Bloomberg) -- China’s move to slash a key interest rate by a record amount is improving the outlook for the nation’s assets as it raises hope that real support for the economy is starting catch up with policymakers’ rhetoric. 

The higher-than-expected cut in the five-year loan prime rate comes after the central bank earlier reduced the floor on the rate for new mortgages Sunday in an attempt to spur demand for new loans, which dropped in April. Extensive Covid control measures have wreaked havoc on the Chinese economy this year, depressing industrial output and consumer spending to the worst levels since the pandemic began.

Read more: China’s Stimulus Tops $5 Trillion as Covid Zero Batters Economy

The CSI 300 benchmark rose as much as 1.8% to its highest in nearly a month, continuing its trend this month of outperforming its US and European counterparts. On the other hand, the yuan fell by 0.3% in the onshore trading, solidifying its position as Asia’s worst-performing currency this month.  

Here’s a selection of comments from market participants:

‘Big Surprise’

The rate cut “comes as a big surprise, and is without doubt a positive in terms of raising market’s sentiment,’ said Niu Chunbao, fund manager at Shanghai Wanji Asset Management Co. It is adding to the optimism caused by “stronger expectations for reopening, especially as Shanghai has reported under 1000 cases for three consecutive days.,” he added. 

Stocks are following a “rally in Dragon Index, LPR cut, Shanghai to further resume, and more expectation of more fiscal policies to come.” Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. Depending on “more fiscal policies after resumption of major cities, June will see recovery in all aspects.”

Support for Housing

The rate cut “should help drive a revival in housing sales, which have gone from bad to worse recently,” said Julian Evans-Pritchard, senior China economist at Capital Economics. As virus-induced restrictions get relaxed, “we think the combination of lower mortgage rates and reduced downpayment requirements lay the groundwork for a revival in housing demand,” he added.

Still, “the lack of any reduction to the one-year LPR suggests that the PBOC is trying to keep easing targeted and that we shouldn’t expect large-scale stimulus of the kind that we saw in 2020,” he said.

“The policy signal to support the real estate market is clear, followed by the previous cut in the lower bound of the mortgage rate,” said Ken Cheung, Chief Asian FX strategist, Mizuho Bank Ltd.

“Today’s asymmetrical rate cut will help address the property sector slowdown while maintaining the prudent monetary policy stance,” said Peiqian Liu, an economist at NatWest Group Plc. “We still think more broad-based easing is needed to further support domestic demand recovery.”

READ: Big Cut to 5-Year LPR Shows Property Support Focus: Bloomberg Intelligence

Positive for Yuan

“We reckon that the 5Y LPR cut, which targets to support the property market, is positive to the RMB” as it will ease the downward pressure on the economy, according to Miuzuho’s Cheung. “Meanwhile, the PBOC refrained from lowering other policy rates including 1Y LPR, 1Y MLF yield and reverse repo yield, this month. Hence, the cut is unlikely to widen the US-China rate spread significantly.” 

“The policy combination will likely have a positive impact on yuan outlook as it should be able to defuse one of the risks haunting the yuan, as policy makers realizes housing market is the biggest tail risk for the Chinese economy,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp.

Reopening Awaited

The effectiveness is limited by lockdowns and the rate cut has less effect on consumer mortgage sentiment, said Cheng Wee Tan, an analyst at Morningstar Inc. “Reopening and buyer sentiment recovery is more key in our view.”

“Today’s LPR reduction coupled with last week’s announcement by regulators to lower bank funding costs and the floor on mortgage rates for first-time buyers could revive flagging housing sales,” said David Chao, a global market strategist at Invesco Hong Kong Ltd. “While virus restrictions have impacted consumer sentiment and housing sales, I expect a meaningful pickup in demand once these measures are relaxed.”

(Updates with comments from Invesco, NatWest and Morningstar)

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