China cuts key rate to stimulate its sluggish economy

The central bank of China cut a key interest rate on Monday in an attempt to reverse the post-COVID slowdown in the world’s second-largest economy.

The economy has recently been dragged down by uncertainty in the labor market and a global slowdown, weighing on demand for Chinese goods.

The financial problems of the real estate sector, with several heavyweights in the sector on the verge of bankruptcy and struggling to complete projects, also hit growth significantly.

Another sign of a slowdown is that lending to households hit the lowest level since 2009 last month.

Faced with this situation, the one-year LPR, which serves as a benchmark for loans to households and businesses, was cut from 3.55% to 3.45%, the People’s Bank of China said (PBoC, for its acronym in English) in a statement. This rate had already been cut in June.

The five-year LPR rate, used to price mortgages, however, remained at 4.2%.

Closely watched by the markets, both rates are now at all-time lows.

The measure on Monday, contrary to the trend in Western central banks, which have raised rates to curb inflation, is intended to encourage Chinese commercial entities to lend money at more advantageous interest rates to companies and households.

“Hidden risks”

Analysts interviewed by the Bloomberg agency, however, expected a more ambitious rate cut.

“This LPR rate cut is disappointing”, and could even be counterproductive if the markets interpret it as a “reluctance” of Chinese power to take more consequential stimulus measures, stressed Maggie Weiof the North American bank Goldman Sachs.

Chinese stock markets did not welcome the announcement. Shanghai lost 1.24% at the close, Shenzhen 1% and Hong Kong 1.82%.

On Friday, the central bank and financial regulators had stressed the need to “support” more economy and reduce “hidden risks and dangers”, according to official media reported this Sunday, without specifying their nature.

A real estate sector in crisis

The long-awaited post-COVID recovery, after the end of the sanitary restrictions at the end of 2022, has lost momentum in recent months, and the real estate sector continues to be in crisis.

The problems of the developer Country Garden, long considered solid and now heavily indebted, raises fears of a bankruptcy with immeasurable consequences for the Chinese financial system.

The bad indicators of the last few weeks accentuate the pressure in favor of a broad stimulus package, something that the authorities refuse to do in order not to increase the debt.

Instead, the government multiplied the measures in favor of the private sector, badly hit during the health crisis, and consumption, through tax deductions.

But these provisions do not seem to have much effect, at a time when one in five young people is also unemployed.

The economic slowdown jeopardizes the growth target set by the authorities, around 5% for this year.

If achieved, it would in any case be one of the lowest annual growth rates in China in decades, not counting the pandemic period.

Beijing recognized on Wednesday “difficulties” economic, but criticized the pessimism of Western analysts, who question their ability to support global growth.

“Surely they will be proven wrong”, he warned Wang Wenbinspokesperson for the Chinese Ministry of Foreign Affairs.

Source: AFP