A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

Senate Finance Committee Chair Ron Wyden (D-OR) have proposed different ways to tax unrealized capital gains every year. Their shared goal is understandable, with trillions of dollars escaping income tax under current law. But each plan raises serious administrative and legal problems. My colleague, Rob McClelland, and I suggest a simpler, more effective approach: Tax unrealized gains of the wealthy at death at a higher rate than if assets are sold or given as gifts during life.

An unrealized gain is the increase in the value of an asset, like stock, which has not yet been sold. Taxing these gains is important because unrealized gains now account for more than half of the staggering amount of wealth of the very richest Americans, those with at least $100 million of net worth.

Current law encourages the wealthy to hold their assets until death, when those gains escape income tax permanently. This happens for two reasons. First, current law does not treat a bequest as a sale so no income tax is due at death. And, second, heirs are allowed a “stepped-up basis” where they never pay tax on any increase in the value of property during a decedent’s lifetime.

The results: Government loses a massive amount of revenue, wealth inequality is perpetuated through generations, and investors are encouraged to retain (or “lock-in”) poorly balanced, and less productive, portfolios. More than fifty years ago, two leading tax experts described the failure to tax gains of property transferred at death as “the most serious defect in our federal tax system.”

To fix this longstanding flaw, our plan would tax unrealized gains at death for the very rich (couples with more than $100 million and singles with more than $50 million) at the tax rate for ordinary income—currently 37 percent. But profits from sales or gifts of assets during life would still be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes.

Our proposal turns the existing incentive for appreciated assets on its head. Instead of encouraging people to hold their appreciated assets until death to avoid income taxes, our proposal encourages them to sell these assets before they die.

For example, imagine an entrepreneur who owns $100 billion of his company stock, for which he paid nothing when he founded the firm. Under our proposal, if he holds his stock until death, he’d owe $37 billion in income tax. But if he sells during life, he would owe $23.8 billion. And, if he wants to transfer his stock to his children without paying the $37 billion, he could give his stock to them during his life and pay $23.8 billion.

To determine the reach of our proposal, Rob reviewed data from the 2019 Survey of Consumer Finances, which he combined with Forbes 400 information (which is excluded from the survey). He estimated that taxpayers subject to our proposal have unrealized gains totaling about $7.5 trillion in 2022.

If these households realize $6 trillion of their $7.5 trillion of that gain during their lifetimes, and the remaining $1.5 trillion at death, our proposal would raise almost $2 trillion over time. Over the next 10 years alone, our plan could raise several hundred billion dollars, just like Biden’s and Wyden’s plan. (Our plan could raise more than theirs eventually, as our tax rate at death is higher than Biden’s and Wyden’s.)

For simplicity, we assumed the unrealized gains don’t grow over time, which likely makes our estimates conservative.

Taxing the wealthiest households on their unrealized gains at death is much easier to administer than Biden’s or Wyden’s plans to tax them annually. Our plan would rely on existing estate tax returns, and valuations, which the rich already file, while Biden’s and Wyden’s plans would require new annual filings for taxpayers during their lifetimes.

While few taxpayers would pay Biden’s or Wyden’s tax, many more would need to value all their assets annually, as taxpayers close to the line might move in and out of the regimes over time. How would the IRS determine whether all these taxpayers filed properly?

Finally, our proposal to collect taxes on transfers by gift or bequests is well -established under the US Constitution, but collecting taxes outside of transfers during their lifetimes raises unresolved legal issues.

Today, older, wealthier taxpayers often hang on to appreciated assets during their lifetimes, waiting to transfer them at death. Our plan encourages them to realize gains during life, which could lead to better balanced portfolios, broaden ownership of these assets, and generate much-needed tax revenue.

I am a Senior Fellow in the Urban-Brookings Tax Policy Center. I research, speak, and write on a range of federal income tax issues, with a focus on business

Source: A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

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Where Not To Die In 2022: The Greediest Death Tax States

Should death be taxing? Amid budget surpluses, states started slashing income taxes last year. But only two have made significant changes to their estate or inheritance taxes so far. Last year Iowa legislators decided to phase out the state’s inheritance tax by January 1, 2025. And this year Nebraska legislators made pro-taxpayer tweaks to its inheritance tax for deaths occurring on or after January 1, 2023.

Other jurisdictions have lessened the tax bite for dying in 2022—through previously scheduled changes or inflation adjustments. But some, without inflation adjustments, are still taxing estates at levels that haven’t budged for years, meaning more families are getting surprise death tax bills. In one of those states—Massachusetts—Democratic legislators are pushing for changes to spare more estates from the tax as part of a broader tax reform package this summer.

In all, 17 states and the District of Columbia levy estate and/or inheritance taxes. Maryland is the outlier that levies both. If you live in one of these states—or might retire to one—pay attention.

These taxes operate separately from the federal estate tax, which applies only to a couple thousand estates a year valued at over $12.06 million per person. (That number is set to drop roughly in half on January 1, 2026, when the Trump tax cuts that temporarily doubled the base exemption from $5 million to $10 million expire.) While few individuals need to plan around the federal estate tax, the state levies all kick in at much lower dollar levels, often making it a middle class problem.

Consider the current state estate tax in Massachusetts. The $1 million estate tax exemption hasn’t been adjusted for inflation since 2006, so it can hit the heirs of middle class folks who have seen their houses and retirement accounts appreciate.

“You can be real estate rich with a modest home, and your estate could be subject to this,” says Scott Cashman, a tax manager with Bowditch & Dewey in Worcester, Massachusetts. “It’s becoming more of an issue every year.” If the $1 million exemption amount set in 2006 had been adjusted for inflation, it would be closer to $1.5 million today.

Say a widow or widower died with a house worth $535,000, a $200,000 bank account, a $350,000 retirement account, and a $15,000 car, for a $1.1 million gross estate. Assuming $50,000 in deductions, the estate tax would be $20,500, he calculates.

(There’s no estate tax when assets are left to a spouse, but in this case the heirs are children.) If the house is worth $1 million, however, the tax would be $65,360— one third of the cash in the bank. Adding to the pain is what’s known as the cliff: Once the $1 million mark is crossed, the estate tax applies to everything over $40,000. “I don’t know if most legislators understand that,” he says.

A bill introduced by Democratic state senators would double the Massachusetts exemption amount to $2 million and only levy tax above that amount, removing the dreaded cliff. “We have such a surplus now, this is the time to do it,” says Cashman. “There’s broad-based support for reform.”

Inheritance taxes—levied in 6 states—can kick in at far lower levels, with the exemption and tax rate depending on the heir’s relationship to the deceased. In New Jersey, for example, if you leave your estate to a Class D beneficiary—including a nephew or non-civil-union partner—they’re taxed at 15% on assets up to $700,000 and 16% on assets above $700,000.

In Nebraska, lawmakers this year fell short of inheritance tax repeal but succeeded in chipping away at the state’s inheritance tax. The new law, effective Jan. 1, 2023, cuts the top tax rates (from 18% to 15%, for example) and increases the exemption amounts (from $10,000 to $25,000, for example). It also eliminates inheritance taxes for heirs under 22, and it makes unadopted step-relatives taxed at the lower rate for nearer family members and not the higher rate for unrelated heirs.

“Lawmakers wouldn’t agree to a general phase-down of the tax at this point that would apply to everyone, but they were willing to accept that if a younger person were to inherit property or cash (and we can use a lot more young residents and entrepreneurs in Nebraska) that it’s not in the state’s economic interest to take any of it away from them,” says Adam Weinberg, communications director with the Platte Institute, which is continuing its effort to repeal the inheritance tax in Nebraska.

Meanwhile, Connecticut, the least taxing of the estate tax states, is on schedule to increase its exemption to $9.1 million in 2022, and then to match the federal exemption for deaths on or after January 1, 2023. In an unusual nod designed to keep the richest taxpayers in the state, Connecticut has a $15 million cap on state estate and gift taxes (which represents the tax due on an estate of approximately $129 million).

Other states with 2022 changes: Washington, D.C. reduced its estate tax exemption amount to $4 million in 2021, but then adjusted that amount for inflation beginning this year, bringing the 2022 exemption amount to $4,254,800. Several states, which all have set their exemption amounts at different base levels, also see inflation adjustments for 2022. Maine’s is $6,010,000, while New York’s is $6,110,000. In Rhode Island, the 2022 exemption amount is $1,648,611.

I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997.

Source: Where Not To Die In 2022: The Greediest Death Tax States

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Is This Stock A Better Pick Over Schlumberger?

The shares of Baker Hughes (NASDAQ: BKR) currently trade 50% above pre-Covid levels observed in January 2020 while the shares of its competitor Schlumberger (NYSE: SLB) are up by just 3%. Does that make SLB stock a better pick over BKR? Both companies provide oil field services including drilling & completion and production solutions to upstream oil & gas companies in the U.S. and abroad. Due to lower benchmark price expectations in the long term, SLB and BKR incurred sizable impairment charges in 2020.

However, the recent uptick in the oil benchmark due to strong demand, supply constraints by the OPEC, and economic sanctions on Russia, have increased demand for oil rigs across the world. Given Baker Hughes’s lower financial leverage, comparable topline to Schlumberger, and a low valuation multiple, Trefis believes that the stock is a good pick to realize more gains.

We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Baker Hughes vs. Schlumberger: With Return Forecast Of 109%, Baker Hughes Is A Better Bet

1. Revenue Growth

Baker Hughes has observed a lower decline in revenues in recent years as compared to Schlumberger. Baker Hughes revenues observed an annual decline of 4% from $22.8 billion in 2018 to $20.5 billion in 2021, whereas Schlumberger reported an annual decline of 11% from $32.8 billion in 2018 to $22.9 billion in 2021. Top line contraction has largely been due to a decline in rig count figures and capital control measures implemented by upstream companies.

  • Schlumberger’s four operating segments, Digital & Integration, Reservoir Performance, Well Construction, and Production Systems contribute 12%, 28%, 36%, and 24% of total revenues, respectively. The uncertain demand environment had persuaded upstream companies to limit capital expenses in the last two years. However, the surge in benchmark prices due to the Russia-Ukraine war has rekindled demand for oil field services – taking worldwide rig count figures from 1,521 in December 2021 to 1,850 at present. Moreover, the company’s digital solutions business is likely to assist margin expansion in the coming years.
  • Baker Hughes’ four operating segments, Oilfield Services, Oilfield Equipment, Turbomachinery & Process Solutions, and Digital Solutions contribute 47%, 12%, 31%, and 10% of total revenues, respectively. The company’s international operations have been assisting the top line in recent times, which observed a 10% contraction from pre-pandemic levels and contributes 80% of total revenues.
  • After reporting relatively flat revenues for FY2021, Baker Hughes and Schlumberger are expected to observe strong growth in FY2022. (related: How Does Schlumberger Make Money?)

2.Returns (Profits)

As both companies incurred sizable impairment charges leading to 25% contraction of the balance sheet, we compare their cash generation capabilities. In 2021, Schlumberger generated $4.6 billion of operating cash from $22.9 billion in total revenues – implying an operating cash flow margin of 20%. Whereas Baker Hughes reported $20.5 billion in total revenues and $2.3 billion of operating cash flow – resulting in a margin of 11%.

  • Schlumberger’s cash generation capabilities have been stronger than Baker Hughes which has resulted in a sizable difference in the P/S ratio. In 2021, Schlumberger and Baker Hughes’ P/S multiple was 1.5 and 1.2 respectively. Historically, it has been observed that there is a difference of 0.5 units between Schlumberger and Baker Hughes.
  • However, the difference between Schlumberger’s non-cash depreciation charges and capital expenditures was higher than Baker Hughes – affecting the operating cash flow margin figures.
  • Before the pandemic, Schlumberger returned 50% of operating cash to shareholders as dividends and invested 30% in property, plant & equipment as capital expenses.
  • Whereas, Baker Hughes had been investing its operating cash in capital assets.
  • Both companies implemented cash control measures and limited capital expenses as well as dividend payouts due to the pandemic. Given Schlumberger’s higher cash generation capabilities and historical dividend trends, it is a good pick to earn consistent dividend income.

3.Risk

Per annual filings, Schlumberger and Baker Hughes reported $13 billion and $6.7 billion of long-term debt, respectively. While a shrinking asset base due to impairment charges is a drag on shareholder returns, Baker Hughes’ lower financial leverage is a boon during uncertain times.

  • Higher financial leverage coupled with continued revenue growth augments equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
  • Schlumberger’s higher financial leverage compared to Baker Hughes, despite similar revenues and a comparable balance sheet size, makes SLB stock a riskier bet.
  • In 2021, Schlumberger and Baker Hughes’ total assets were $41 billion and $35 billion, respectively.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Led by MIT engineers and Wall Street analysts, Trefis (through its dashboards platform dashboards.trefis.com) helps you understand how a company’s products.

Source: Is This Stock A Better Pick Over Schlumberger?

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Critics:

U.S. oil field services company Baker Hughes said Saturday that it was suspending new investments for its Russia operations, a day after similar moves were announced by rivals Halliburton Co. and Schlumberger.

The steps from the Houston, Texas-based businesses come as they respond to U.S. sanctions over Russia’s invasion of Ukraine. In its statement, Baker Hughes, which also has headquarters in London, said the company is complying with applicable laws and sanctions as it fulfills current contractual obligations. It said the announcement follows an internal decision made with its board and shared with its top leadership team.

“The crisis in Ukraine is of grave concern, and we strongly support a diplomatic solution,” said Lorenzo Simonelli, chairman and CEO of Baker Hughes. Halliburton announced Friday that it suspended future business in Russia. Halliburton said it halted all shipments of specific sanctioned parts and products to Russia several weeks ago and that it will prioritize safety and reliability as it winds down its remaining operations in the country.

Schlumberger said that it had suspended investment and technology deployment to its Russia operations. “Safety and security are at the core of who we are as a company, and we urge a cessation of the conflict and a restoration of safety and security in the region,” Schlumberger CEO Olivier Le Peuch said in a statement.

Oil companies ExxonMobil, Shell, and BP, along with some major tech companies like Dell and Facebook, were among the first to announce their withdrawal or suspension of operations. Many others, including McDonald’s, Starbucks and Estee Lauder, followed. Roughly 30 companies remain.

Ukrainian President Volodymyr Zelenskyy on Wednesday asked Congress to press U.S. businesses still operating in Russia to leave, saying the Russian market is “flooded with our blood.”

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Renters Insurance: What It Covers and How Much You Need

Whether you’re renting an apartment or a home, chances are you may not have thought about renters insurance.

Sure, insuring a home you buy makes sense — but you’re renting. Isn’t insurance your landlord’s responsibility? Not entirely. While your landlord will maintain and insure the property, it’s up to you to insure the belongings inside it.

That’s where renters insurance comes in. For a pretty inexpensive monthly premium (on average, about $15/month), you can have peace of mind that your possessions are financially protected if vandalism or disaster strikes.

Over your lifetime, you may have several different homes. Each time you move, it’s essential that you protect your things with the best renters insurance you can find so any damages can be repaired and losses replaced.

What is renters insurance?

A renters insurance policy, also known as an HO-4, covers your losses in case of theft, fire or other damage. If plumbing breaks in your apartment and damages belongings in the apartment beneath yours, renters insurance could help pay for repairs and replacements.

It also offers liability coverage, which means your insurance company will pay legal fees and court awards in case of injury or damage due to negligence. For example, if someone gets injured in your rental home and sues, renters insurance could help cover those legal costs.

Standard policies also offer additional living expenses for situations where the rental property gets damaged and becomes uninhabitable, displacing you from your home.

Renters insurance is not legally required, but some landlords might require it if you want to rent from them. However, even if it’s not required and the chances of these things happening are slim, it’s still best to prepare for the worst so you can have peace of mind.

What does my renters insurance policy cover?

Policies can differ slightly from state to state, and offerings vary between insurance companies. But overall, renters insurance policies are pretty standard.

This is what most renters insurance policies include.

Personal belongings

Standard HO-4 policies protect your things against damage from the following listed disasters and incidents, called named perils.

  1. Fire or lightning
  2. Windstorm or hail
  3. Explosion
  4. Riot or civil commotion
  5. Damage caused by aircrafts
  6. Damage caused by vehicles
  7. Smoke
  8. Vandalism
  9. Theft
  10. Volcanic eruption
  11. Falling objects
  12. Weight of ice, snow or sleet
  13. Water damage caused by steam, heating, AC, sprinklers or an appliance
  14. Sudden and accidental tearing apart, cracking, burning or bulging of a hot water heating system, AC or sprinkler system
  15. Freezing of plumbing, AC, sprinkler system or appliance
  16. Damage caused by short-circuiting

Liability

Most policies offer personal liability protection — meaning the policy would help cover the legal costs and court payouts (up to the policy limit) should someone sue you or your family members for bodily harm or property damage.

Liability policy limits typically start at about $100,000. You are able to buy coverage with a higher liability limit. For example, a policy with $60,000 in property coverage, $300,000 liability protection and a $1,000 deductible costs an average of $266 each year.

On the other hand, raising your deductible $1,000 can save you $10 on your premium each month.

Liability protection can also pay for damage caused by your pet. Ask your agent about this.

Additional living expenses

Should damage make your home uninhabitable, your policy can help cover the costs of living elsewhere. Policies can cover hotel bills or temporary rental costs, meals and other expenses while you’re away from your home.

Miscellaneous

Most policies protect from some losses that you may have not given much thought to, but should still ask your agent about.

These other types of coverage can include:

  • Medical payments to others should they get hurt in your home.
  • Credit card and bank forgery in the event that someone breaks into your home and tries to use your stolen credit card or checks.
  • Other peoples’ property should their items get damaged or stolen while in your home.

What doesn’t renters insurance cover?

Like most standard property insurance policies, renters insurance doesn’t cover some types of damage.

Flooding, earthquakes and sinkholes

These natural disasters aren’t covered by renters insurance. For areas where these events often occur (if you live near a fault line or your rental is in a flood zone), think about taking out additional coverage. Ask your agent about the weather events common to your area, and plan accordingly.

Maintenance damage

Home insurance companies rule that it’s the policyholder’s responsibility to take precautionary steps to protect the rental from damage. So, policies will not cover incidents due to lack of maintenance or infestations like mold or termites.

Big-ticket valuables

Expensive belongings like art, jewelry and antiques may not be covered due to policy limits. All policies come with a coverage limit — some may be as low as $5,000. You can take out supplementary policies (called riders) to cover those valuables.

How much renters insurance coverage do I need?

To answer this question, you’ll need to make a list. Take out that pen and paper or find a list-making app and take an inventory of everything you own and every item’s value.

Take a picture or video of your rental and your most important belongings. Include any serial numbers for things like electronics and instruments. Also, think through the big-ticket items you’ll need additional coverage for. This is the time to insure that beautiful engagement ring.

Now, tally all of that up. If you can’t get a precise number, at least ballpark it. Your agent will need to know that number.

The valuation of your items will also impact whether you should go with an actual cash value policy (ACV) or a replacement cost value policy (RCV).

  • ACV: Under this type of policy, insurers will pay out the depreciated value of an item. The payout will likely be less than market value and it could cost you more money to replace the item. ACV policies often have lower premiums.
  • RCV: This type of policy pays to replace your lost or damaged belongings with a similar item at the current market value. The payout would be enough to replace your item.

What will my deductible be?

The cost of your deductible depends on the policy you choose.

A renters insurance deductible is the amount you will have to pay if you file a claim. The higher the deductible, the lower the monthly premium — but the more you’ll have to pay should the worst case scenario occur.

The most common amounts for a deductible are either $500 or $1,000, but some companies will let you choose a lower or higher deductible.

Think through your budget and your risk comfort level. How much of a monthly premium can you afford? Are you able to pay out of pocket if theft or damage actually happens?

The bottom line

Don’t wait to own a house before you insure your belongings. For a small premium, you can have peace of mind that your belongings are covered, you have liability protection and you have a safety net if accident or disaster makes your home uninhabitable.

Your landlord’s insurance only goes so far. Take steps to protect what you and your family value most.

Frequently Asked Questions

Does renters insurance cover moving?

No. Your renters insurance policy is designed to protect one property and the belongings inside of it. Most coverage is restricted to a single address, but some companies will allow you to purchase special insurance for your move.

What happens to renters insurance if you move?

When you move, you need to inform your insurance company so they can update your account. Your policy will be updated to reflect your new address, so your premium could be affected, going up or down depending on where you live. Your renters insurance policy will not likely cover your move, so you may need to purchase additional coverage to protect the actual transport of your belongings.

How do I update my renters insurance?

Most of the best renters insurance companies make it easy to update your renters insurance. Companies like Geico have excellent mobile tools, allowing you to change your address either through the app or on the website. USAA, on the other hand, requires that you call customer service at 1-800-531-USAA to change the address on your policy. You can only change your mailing address online.

How can I save on renters insurance?

One  reliable way to save would be to bundle your renters insurance with your auto insurance. Contact your auto insurance provider and see if there’s a discount!

But don’t just stop there. Shop around. You may be able to find cheap renters insurance from a different company than you’d first considered.

Whether you want to hire a broker to do the leg work for you or you feel internet savvy enough to do it yourself, get multiple renters insurance quotes. You have the power and the ability to find the best deal.

Source: Renters Insurance: What it Covers and How Much You Need | MYMOVE

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Critics:

By: Sarah Schlichter

NerdWallet compared rates across the U.S. to determine the average cost of renters insurance in every state. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page.

However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here’s how we make money. The average renters insurance cost in the U.S. is $168 per year, or about $14 per month, according to NerdWallet’s latest rate analysis.

This estimate is based on a policy for a hypothetical 30-year-old tenant with $30,000 in personal property coverage, $100,000 in liability coverage and a $500 deductible.While the nationwide average is a useful baseline, renters insurance rates vary based on where you live and how much coverage you need.

These are the five most expensive states for renters insurance:

  • Louisiana: $262 per year, or $22 per month, on average.

  • Georgia: $243 per year, or $20 per month, on average.

  • Mississippi: $228 per year, or $19 per month, on average.

  • Kansas: $225 per year, or $19 per month, on average.

  • Alabama: $222 per year, or $19 per month, on average.

Meanwhile, these are the five cheapest states for renters insurance:

  • Wyoming: $101 per year, or $8 per month, on average.

  • Iowa and Vermont (tie): $110 per year, or $9 per month, on average.

  • North Dakota and Pennsylvania (tie): $116 per year, or $10 per month, on average.

If you live in one of the country’s 25 largest metropolitan areas, you can find the average cost of renters insurance in your city below. Atlanta is the most expensive at $269 per year on average (about $22 per month), while Columbus is the most affordable at $137, or about $11 per month, on average…

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The Best Home Insurance Companies of 2021

Best Renters Insurance
What You Need to Know About Home Insurance
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China Cuts Key Rates, Steps up Monetary Stimulus to Boost Economy

SHANGHAI (Reuters) -China lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy, after data earlier in the week pointed to a darkening outlook for the country’s troubled property sector.

The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by China’s central bank on Monday to its short- and medium-term lending rates, and came days after the central bank’s vice governor flagged more moves ahead.

With the property sector’s downturn seen persisting into 2022 and the fast-spreading Omicron variant dampening consumer activity, many analysts say those easing measures will be necessary, even as other major economies, including the United States, appear set to tighten monetary policy this year.

December economic data showed further weakening in consumption and the property sector, both major growth drivers.

At a monthly fixing on Thursday, China lowered its one-year loan prime rate (LPR) by 10 basis points to 3.70% from 3.80%. The five-year LPR was reduced by 5 basis points to 4.60% from 4.65%, its first cut since April 2020.

China’s central bank “should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner,” People’s Bank of China Vice Governor Liu Guoqiang said on Tuesday, heightening market expectations for more stimulus.

All 43 participants in a snap Reuters poll had predicted a cut to the one-year LPR for a second straight month. Among them, 40 respondents also forecast a reduction in the five-year rate.

The cut to the 5-year rate suggested that “the Chinese authorities are keen to lower the cost of credit lending, so total credit growth is expected to rebound after the Spring Festival to ease the pressure on macro economy,” said Marco Sun, chief financial analyst at MUFG.

“China’s monetary policy still has some room for easing in the first half of this year, depending on the policy transmission effect and the growth target set by annual parliamentary meeting in March.”

Property firms’ shares and bonds jumped on Thursday following the LPR cut, as investors hoped it and other recent government measures would help to ease a funding squeeze in the sector that has seen a growing number of developers default on their debts.

Sheana Yue, China economist at Capital Economics, expects a further 20 bps cut to the one-year LPR in the first half of this year.

Interest rates on medium-term lending facilities (MLF) serve as a guide to the LPR. Market participants believe moves to the LPR should mimic adjustments to MLF rates.

Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages.By:

Source: https://www.reuters.com

Read more stories at: https://money.usnews.com/

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