China’s central bank cut key interest rates on Tuesday for loans issued by the state-controlled banking system, in the clearest sign yet of mounting concern in the Chinese government and corporate sector that the country’s economy is stalling.
The interest rate cut was small — a tenth of a percentage point for the country’s benchmark one-year and five-year interest rates for loans. But because almost all of the country’s corporate lending and mortgages are linked to the two rates, the reductions could have some effect on the overall pace of economic growth.
The move by the central bank, the People’s Bank of China, puts China at odds with policies in the West. The Federal Reserve spent over a year battling inflation by raising rates before pausing earlier this month. The European Central Bank has also been pushing up interest rates in response to inflation.
But China has the opposite problem: Spending and private sector investment are so weak that businesses have been vying with each other to cut prices to keep customers. Consumer and producer prices actually fell for the four months through May.
Investors were underwhelmed by the central bank’s rate cuts. Share prices slipped on Tuesday across much of Asia, particularly in Hong Kong. The rate cut was slightly smaller than many investors had hoped for and provided a reminder that the Chinese economy is struggling.
China’s currency, the 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, working around China’s stringent restrictions on large overseas transfers of funds.
Cutting rates is slow-working medicine for the Chinese economy, said Han Shen Lin, a former deputy general manager for China at Wells Fargo Bank who now teaches finance at New York University in Shanghai. Corporations typically negotiate once a year with their banks on their borrowing limit, then take out loans of anywhere from a couple of weeks to several months. Only as new loans are made, or existing loans are rolled over, is the lower interest rate applied.
The central bank’s reduction on Tuesday “will seep through the system, but only gradually,” Mr. Lin said.
Households will need to wait even longer to benefit. Interest rates on mortgages are almost always adjustable in China. But the adjustment often happens in January, China’s central bank said on Tuesday, in an explanatory statement that accompanied the announcement of the interest rate reduction.
So while people buying homes in the next few months may benefit from the new cuts, many homeowners will need to wait longer.
The move on Tuesday was the first reduction in loan 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 the message that Beijing wants to stabilize output at a time when exports are falling, construction has stagnated and consumer confidence is weak. The government’s abrupt abandonment of Covid controls at the end of last year had sparked hope that China’s economy would snap back.
The modest scale of the interest rate reductions suggests concern among China’s economic policymakers, but not panic. As the global financial crisis gathered speed in late 2008, by 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 of the late 1990s, China cut loan 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 the benchmark rate plus one or more percentage points, with smaller companies and private-sector businesses paying more than big companies and state-owned enterprises.
The five-year rate, used as a benchmark for setting mortgage rates, was cut to 4.2 percent from 4.3 percent. Home buyers and homeowners often pay another percentage point above that level.
Source: New York Times
