New worries: The People’s Bank of China building in Beijing. The country’s consumer-driven recovery is showing more signs of losing momentum as spending slows on everything from holiday travel to cars and homes. — Bloomberg
Beijing: China’s central bank unexpectedly reduced a key interest rate by the most since 2020 to bolster an economy that’s facing fresh risks from a worsening property slump. The yuan and bond yields slumped.
The People’s Bank of China (PBoC) lowered the rate on its one-year loans – or medium-term lending facility (MLF) – by 15 basis points to 2.5% yesterday.
All but one of the 15 analysts surveyed by Bloomberg had predicted the rate would stay unchanged. The seven-day reverse repurchase rate, a short-term policy rate, was cut by 10 basis points to 1.8%.
The surprise move came shortly before the release of July economic activity data from the National Bureau of Statistics that showed a faltering recovery.
The central bank’s surprise rate cut followed a 10-basis-point reduction to the MLF rate in June and a slew of disappointing economic data recently.
Bank loans plunged to a 14-year low in July, while consumer and producer prices declined together for the first time since late 2020, a sign of deflation in the economy.
“The slightly earlier timing and a larger than expected 15 basis point rate cut of MLF show that Beijing feels the urgency to take more policy easing actions to stabilise expectations and growth,” said Xiaojia Zhi, chief China economist at Credit Agricole. There’s likely to be more monetary policy easing in the coming months, Zhi said.
The PBoC’s surprise suggests heightened concern about the deteriorating outlook, especially in the real estate market, where another major property developer now faces a debt crisis and home sales continue to decline.
The reduction in interest rates boosted government bonds and weighed on the exchange rate. China’s 10-year yield fell seven basis points to 2.56%, the lowest since 2020.
Beijing is facing more calls to add monetary and fiscal stimulus to support growth, although its response so far has been fairly muted despite a pro-growth tilt by the Communist Party’s Politburo in July.
A central bank adviser has called for direct support to consumers to help boost spending, an approach that senior officials have so far been reluctant to take.
The Chinese central bank’s easing action will add more pressure on the yuan, which fell to its weakest level since November as the economy’s growth outlook wanes.
The PBoC has set its daily fixing for the currency at a stronger-than-expected level every day since late June. Top Communist party leaders vowed to keep the yuan in a “basically stable” range in a key meeting last month.
The PBoC also provided 401 billion yuan of medium-term loans, slightly more than the 400 billion yuan maturing in August. — Bloomberg
