China cuts key interest rate to support economy

BEIJING: China’s central bank on Monday cut key interest rate in an attempt to counter the post-Covid growth slowdown in the world’s second-largest economy.

Activity has been dragged down recently by uncertainty in the labour market and global economic sluggishness, weakening demand for Chinese goods.

Financial troubles in the real estate sector, with several leading developers on the verge of bankruptcy and struggling to complete projects, also pose a major obstacle to growth.

The People’s Bank of China said on Monday cut the one-year loan prime rate, which serves as a benchmark for corporate loans, from 3.55 percent to 3.45 percent.

However, the five-year LPR, which is used to price mortgages, was held at 4.2 percent.

Closely followed by the markets, the two rates are now at historic lows, after previous reductions in June.

The decision is intended to encourage commercial banks to grant more loans and at more advantageous rates.

Monday’s measures — which run counter to rising interest rates around the world as other major economies work to curb inflation – aim to indirectly support economic activity as growth flags.

The long-awaited post-Covid recovery following the lifting of health restrictions at the end of 2022 has run out of steam in recent months.

In another sign that the recovery is faltering, loans to households fell last month to their lowest level since 2009.

To reinvigorate the economy, the central bank reduced the rate for its medium-term lending facility to financial institutions last Tuesday.

And financial regulators agreed Friday on the need for “financial support”, while avoiding “risks and hidden dangers”, state media reported.

Analysts polled by Bloomberg expected a bigger cut to the LPR following the Friday meeting.

In a note following the Monday announcement, Goldman Sachs economist Maggie Wei described the LPR cut as “disappointing”, adding that it “would not help with building confidence” as Chinese authorities pursue an economic recovery.

The move “can even backfire if market participants interpret these easing measures as policymakers’ unwillingness to deliver even moderate policy stimulus”, wrote Wei.

Traders appeared unimpressed with the move, with Hong Kong stocks down 1.4 percent and Shanghai off 0.6 percent.

The central bank’s decision comes as a crisis at property giant Country Garden, long deemed financially sound and now ultra-indebted, raises fears of a bankruptcy that could have dire consequences for the domestic financial system.

Country Garden’s problems are building just two years after a crisis erupted at major rival Evergrande, which is struggling with huge debt.

In addition to the real estate woes, growth is also hampered by sluggish consumption amid uncertainty in the labour market and a global economic slowdown.

That is weighing on demand for Chinese goods, slowing the activity of thousands of factories.