Amid a struggling economic rebound, China lowers its key interest rate.
China’s central bank has reduced one of its key interest rates for the second time in three months, reflecting the country’s struggle to recover from the pandemic’s impact on its economy.
The People’s Bank of China (PBOC) has lowered the one-year loan prime rate from 3.55% to 3.45%. China’s recovery from the post-COVID period has been hindered by a property crisis, declining exports, and weak consumer spending. In contrast, other major economies have increased rates to counter high inflation.
The PBOC had previously cut its one-year rate, which influences the majority of China’s household and business loans, in June. According to Jun Bei Liu from Tribeca Investment Partners, while this move may not have a significant effect, it demonstrates the Chinese government’s commitment to economic revival. Liu mentioned the need for a larger stimulus package to boost confidence and drive up consumption and growth, warning of the risk of the economy faltering into deflation without such measures.
Economists anticipated a reduction in the five-year loan prime rate, to which the country’s mortgages are tied, but it remained unchanged at 4.2%. In a surprising move, short- and medium-term rates were also cut last week.
Catherine Yeung, investment director at Fidelity International, suggested that additional rate cuts could coincide with government spending and targeted measures to aid the property market. Beijing’s focus on restoring confidence is balanced with concerns about the long-term implications of these policies.
China’s economy continues to grapple with various major challenges following the global pandemic, including a troubled property market highlighted by Evergrande’s bankruptcy protection filing in the US. This heavily indebted company is striving to negotiate a multi-billion-dollar deal with creditors. Another major property developer, Country Garden, also warned of potential losses. China’s imports and exports faced a significant decline in July, signalling threats to its recovery due to weaker global demand.
Beijing’s decision to halt the release of youth unemployment figures, previously seen as an indicator of the country’s slowdown, raises additional concerns. In June, China’s jobless rate for individuals aged 16 to 24 in urban areas reached over 20%, a record high.