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Saturday, July 20, 2024

China Implements Key Interest Rate Reduction to Revitalize Slowing Economy

The Chinese government and private sector have expressed growing worry that the Chinese economy is slowing, and on Tuesday the People’s Bank of China (PBOC) lowered key interest rates on loans made by the state-controlled banking system.

The reduction in the benchmark interest rate for a loan over one year and the benchmark interest rate for a loan over five years was quite minor. However, the cutbacks might slow economic development since practically all business lending and mortgages in the nation are tied to the two rates.

This decision by the People’s Bank of China, the country’s central bank, puts Beijing at conflict with Western policy. After fighting inflation with rate hikes for almost a year, the Federal Reserve finally took a break early this month. As a result of inflation, the European Central Bank has also been increasing interest rates.

However, the converse is true in China, where sluggish consumer spending and private sector investment have led to price wars among retailers. For the four months ending in May, both consumer and producer prices decreased.

The rate cuts announced by the central bank failed to impress investors. On Tuesday, stock markets around Asia, and Hong Kong in particular, fell. A lesser rate drop than many investors had anticipated for highlighted the continuing weakness of China’s economy.

Even China’s yuan lost value versus the dollar. Companies and individuals in China have been motivated to circumvent China’s tough regulations on substantial foreign transfers of cash due to the country’s lower interest rates compared to the United States in recent months.

Former Wells Fargo Bank China deputy general manager and current New York University Shanghai finance professor Han Shen Lin argues that rate cuts are a “slow-working medicine” for the Chinese economy. Borrowing limits between banks and corporations are discussed annually, and corporations then take out loans with terms ranging from a few weeks to several months. The reduced interest rate will be applied only to new loans or to refinanced balances.

The time it takes for households to reap the benefits will increase. In China, mortgage interest rates are often variable. However, in an accompanying statement to Tuesday’s interest rate cut announcement, China’s central bank noted that the adjustment typically takes place in January.

As a result, the new reductions may help homebuyers in the coming months, but many current homeowners may have to wait longer.

China’s economy was still hurting last August following a two-month Covid shutdown in Shanghai, thus the decision on Tuesday was the first cut in lending rates since then. Beijing’s intention to stabilise production is signalled by these new cutbacks, which come as exports decline, construction slows, and consumer confidence plummets. There was optimism that China’s economy would recover when the government suddenly abandoned Covid regulations at the end of last year.

The size of the interest rate cuts is indicative of worry rather than panic on the part of China’s economic leaders. In contrast, China’s central bank slashed its benchmark lending and deposit rates by 1.08 percentage points in a single day as the global financial crisis intensified in late 2008. In addition, China lowered its borrowing rates by 1.44 percentage points in a single day during the Asian financial crisis of the late 1990s.

The rate for a year of borrowing at the prime market rate was reduced from 3.65 percent to 3.55 percent on Tuesday. Typically, firms will pay the benchmark rate plus one or more percentage points, with smaller businesses, those in the private sector, and state-owned organisations paying more than their larger counterparts.

Mortgage rates are based on the five-year rate, which was recently reduced from 4.3 percent to 4.2 percent. A further percentage point is common for homebuyers and homeowners to pay.

Dan O'Brien
Dan O'Brien
I am a journalist for The National Era with an emphasis in sports.
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