China cuts benchmark lending rate in a bid to boost economy

It is the largest cut to the rate since it was introduced in 2019. — Bloomberg

BEIJING: China’s central bank cuts a key benchmark lending rate used to price mortgages as Beijing seeks to rescue its housing market from a deepening crisis and boost flagging growth in the country’s economy.

China has struggled to kickstart growth as it battles a prolonged property sector downturn, soaring youth unemployment and a global slowdown that has hammered demand for goods from the world’s second-largest economy.

The five-year loan prime rate (LPR) was lowered from 4.2% to 3.95%, the People’s Bank of China announced, in the first cut since June.

It is the largest cut to the rate since it was introduced in 2019, according to Bloomberg. And it is deeper than what economists polled expected.

The one-year LPR, which serves as a benchmark for corporate loans, remained unchanged at 3.45%. The one-year rate was last lowered in August, while the five-year LPR had previously been reduced in June.

Yesterday’s moves are aimed at encouraging commercial banks to grant more credit at more advantageous rates.

They come in stark contrast to most other major economies, where rates have been raised in a bid to curb inflation, part of a global slowdown that is hitting demand for Chinese exports.

China last year recorded one of its worst annual growth rates since 1990, dampening hopes for a rapid economic recovery following the end of draconian Covid restrictions in late 2022.

In January, consumer prices fell at their quickest rate in more than 14 years, piling pressure on the government to make more aggressive moves to revive the battered economy.

At the heart of the woes is an unprecedented crisis in real estate, a key engine of growth that has long represented more than a quarter of gross domestic product.

Financial troubles at major firms such as Evergrande and Country Garden have fuelled buyer mistrust against a backdrop of unfinished housing developments and falling prices.

Property was for years seen by many Chinese as a safe place to park savings, but price drops have hit their wallets hard and Beijing’s support measures for the sector have so far had little effect.

One analyst said yesterday’s move could be “another step in the right direction to address the deflation problem China faces”.

Deflation, which harms employment and demand, can be a brake on the profitability of companies.

“I think there will be more rate cuts to come this year in China,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

The decision to cut rates deeper than expected, Zhang added, “may indicate that policymakers recognise the urgency to take action quickly”.

Policymakers have in recent months announced a series of measures, as well as the issuance of billions of dollars in sovereign bonds, aimed at boosting infrastructure spending and spurring consumption.

Last month, Beijing announced it would cut the amount banks must hold in reserve, known as the reserve requirement ratio.

But that and recent announcements, including central bank interest rate cuts and measures to boost lending, have had little impact so far.

There were some bright spots, however. Official data showed on Sunday that consumption rebounded during the recent Chinese New Year holidays, exceeding even pre-pandemic levels.

But analysts cautioned that the slightly longer than usual holiday period this year meant a comparison would likely be distorted. — AFP

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