China’s central bank cuts lending rates

China's central bank cuts lending rates

China’s central bank cut key interest rates on Tuesday for loans issued by the state-controlled banking system, in a clear sign of growing concern in the Chinese government and corporate sector that the country’s economy is stalling.

The interest rate cut was small – one-tenth of a percentage point for the country’s benchmark one-year and five-year interest rates for loans. But because nearly all of the nation’s corporate loans and mortgages are linked to the two rates, the cut could have some impact on the overall pace of economic growth.

The move by the central bank, the People’s Bank of China, has put China at odds with policies in the West. The Federal Reserve spent more than a year battling inflation by raising rates before pausing earlier this month. The European Central Bank is also raising interest rates in response to inflation.

But China has the opposite problem: spending and private sector investment are so weak that businesses are racing to cut prices to retain customers. Consumer and producer prices actually fell for four months through May.

Investors are underwhelmed by the central bank’s rate cut. Share prices slid in most of Asia on Tuesday, especially in Hong Kong. The rate cut was slightly smaller than many investors were expecting and provided a reminder that the Chinese economy is struggling.

China’s currency Renminbi also weakened against the dollar. In recent months, lower interest rates in China than in the United States have created an incentive for companies and households in China to move their money out of the country, despite China’s tighter restrictions on large overseas transfers of wealth. working around.

Han Shen Lin, former deputy general manager for China at Wells Fargo Bank who now teaches finance at New York University in Shanghai, said the rate cut is a slow-acting drug for the Chinese economy. Corporations typically negotiate their borrowing limits with their banks once a year, then borrow for anywhere from a few weeks to several months. Only when new loans are given, or existing loans are rolled over, does the lower interest rate apply.

Tuesday’s central bank cuts “will seep through the system, but only gradually,” Mr Lin said.

Families will have to wait longer for the benefits. Interest rates on mortgages are almost always adjustable in China. But adjustments often happen in January, China’s central bank said in an explanatory statement on Tuesday, which accompanied the interest rate reduction announcement.

So while people buying homes in the next few months could benefit from the new deduction, many homeowners will have to wait longer.

Tuesday’s move was the first reduction in lending rates by China since last August, when the country’s economy was still struggling after a two-month Covid lockdown in Shanghai. The latest cuts send a message that Beijing seeks to stabilize output at a time when exports are falling, manufacturing has stagnated and consumer confidence is weak. The government’s sudden abandonment of Covid controls late last year raised hopes that China’s economy would be derailed.

The modest scale of the interest rate cut prompts concern among China’s economic policymakers, but not panic. As the global financial crisis gathered pace in late 2008, in contrast, China’s central bank cut its benchmark loan and deposit rates by 1.08 percentage points in a single day. And during the Asian financial crisis in the late 1990s, China cut lending rates by 1.44 percentage points in one day.

Tuesday’s cut brought the benchmark one-year rate to 3.55 percent from 3.65 percent. Companies typically pay one or more percentage points above the benchmark rate, with smaller companies and private sector businesses paying more than larger companies and state-owned enterprises.

The five-year rate used as the benchmark for setting mortgage rates was cut from 4.3 percent to 4.2 percent. Home buyers and landlords often pay another percentage point above that level.

Source link

Leave a Comment

Your email address will not be published. Required fields are marked *

− 5 = 5