China’s central bank on Tuesday cut its benchmark interest rate on loans controlled by the state-controlled banking system, the clearest sign yet that China’s government and the corporate sector are on the move. More and more concerned that the country’s economy is stagnating.
The rate cut is small – a tenth of a percentage point on the country’s benchmark one-year and five-year lending rates. But since nearly all of the country’s corporate loans and mortgages are linked to two interest rates, the cuts could have some effect on overall 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 more than a year fighting inflation by raising interest rates before pausing earlier this month. The European Central Bank has also raised interest rates in response to inflation.
But China has the opposite problem: Private-sector spending and investment is so weak that businesses race to cut prices to keep customers. Consumer and producer prices actually fell in the four months to May.
Investors have been overwhelmed by the central bank’s rate cuts. Share prices fell on Tuesday across Asia, particularly in Hong Kong. The rate cut was slightly smaller than many investors had hoped for and provided a reminder that China’s economy is struggling.
The Chinese yuan 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 money abroad, around China’s strict restrictions. for large remittances abroad.
Han Shen Lin, a former deputy general manager for China at Wells Fargo Bank, who now teaches finance at New York University in Shanghai, said the rate cut was the effective slowing medicine for the Chinese economy. Country. Companies typically negotiate once a year with their banks about their borrowing limits, then withdraw the loans over a period of weeks to months. Only when new loans are made, or existing loans are extended, will the lower interest rate apply.
Mr. Lin said Tuesday’s central bank cuts “will seep through the system, but only gradually”.
Households will have to wait even longer to benefit. Mortgage rates are almost always adjusted in China. But the adjustment usually occurs in January, China’s central bank said on Tuesday, in an explanatory statement accompanying the announcement of a rate cut.
So while homebuyers over the next few months may benefit from the new cuts, many homeowners will have to wait longer.
Tuesday’s move was China’s first cut in lending rates since last August, when the country’s economy was still struggling after two months of Covid-19 lockdown in Shanghai. The latest cuts send the message that Beijing wants to stabilize output at a time when exports are falling, construction activity has stalled and consumer confidence has weakened. The government’s sudden abandonment of Covid control measures late last year raised hopes that China’s economy would bounce back.
The modest scale of the rate cut suggests that China’s economic policymakers are concerned, but not alarmed. In contrast, as the global financial crisis accelerated in late 2008, China’s central bank cut its basic deposit and lending rates. up 1.08 percentage points in one day. And during the Asian financial crisis of the late 1990s, China cut lending rates by 1.44 percentage points in one day.
Tuesday’s cut brought the one-year base rate to 3.55% from 3.65%. Companies typically pay the standard rate plus one or more percentage points, with smaller firms and private sector firms paying more than large companies and state-owned enterprises.
The five-year interest rate, which is used as a benchmark for setting mortgage rates, fell to 4.2% from 4.3%. Homebuyers and homeowners typically pay another percentage point above that.
