China lowers key interest rates as the economy slows

China lowers key interest rates as the economy slows

SHANGHAI/SINGAPORE: On Monday, China lowered its benchmark lending rate for one year as part of increased efforts to boost credit demand. However, markets were taken aback when China kept the rate for five years unchanged despite broader worries about a rapidly depreciating currency.

Due to a worsening real estate slump, weak consumer spending, and falling credit growth, the recovery in the second-largest economy in the world has lost momentum, strengthening the case for policy stimulus from the government.

However, analysts claim Beijing has limited room for further monetary easing due to downward pressure on the yuan, as a further widening of China’s yield differentials with other major economies could lead to yuan selloffs and capital flight.

In contrast to the five-year LPR, which remained at 4.20 percent, the one-year loan prime rate (LPR) was reduced by 10 basis points from 3.55 percent to 3.45 percent.

35 market observers were surveyed by Reuters, and all of the respondents forecast reductions in both rates. The average poll respondent anticipated a 15 bp cut, so the 10 bp decrease in the one-year rate was less than anticipated.

While maintaining another key lending rate, China’s central bank surprised economists who had anticipated more forceful action to support economic growth in the face of widespread concerns about its course.

In the midst of a slowdown, the second-largest economy in the world has entered a state of deflation, with prices falling year over year as slowing domestic spending hampers the nation’s post-Covid economic recovery.

Due to the slowdown exposing overextended developers, China’s real estate market is also in trouble. In an effort to restructure its sizable debts, Evergrande Group, formerly China’s top property developer, filed for bankruptcy protection in the US on Friday.

The People’s Bank of China (PBoC), the nation’s central bank, has responded by lowering interest rates; however, its most recent action on Monday surprised economists who had anticipated a more significant change.

China reduced its benchmark one-year loan prime rate, which is primarily used to price mortgages, from 3 point 55 percent to 3 point 45 percent, but left its equivalent five-year rate at 4 point 2 percent. According to Reuters’ poll of economists, the consensus forecast for both rates was a reduction of 0 points and 15 percentage points.

In early trade, the onshore yuan softened to 7.3078 per dollar from 7.2855 at the previous close, while the benchmark Shanghai Composite index and the blue-chip CSI 300 index both fell.

One of the worst performing Asian currencies this year is the yuan, which has lost almost 6% of its value against the dollar so far.

Following an unanticipated decrease in its medium-term policy rate last week, the People’s Bank of China (PBOC) cut its one-year LPR.

The rate at which the central bank lends to some banks on a medium-term basis was reduced by 0 points, 15 percentage points, last week, surprising the market. It was anticipated that this would lower borrowing costs across the board.

Chinese officials are attempting to strike a balance between efforts to boost the economy and worries about the stability of their banks, according to economists Julian Evans-Pritchard and Zichun Huang of the consultancy Capital Economics.

The monetary policy strategy employed by the PBoC, in the broad scheme of things, is of limited value in the current environment and won’t be sufficient—on its own, at least—to support growth, they wrote.The housing market would need to be stabilized through much larger rate cuts or regulatory actions in order to effectively increase demand.

Particularly noticeable are the pressures on the Chinese economy in the real estate market. Both the heavily indebted Evergrande and its rival developer Country Garden run the risk of defaulting on some of their loans, endangering the future of housing projects across China for which many households have already made payments.

In a statement released on Sunday, the central bank stated that it would coordinate financial support to address local government debt issues while also optimizing credit policies for the real estate sector.

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