China’s efforts to revive its economy in the aftermath of the pandemic have led its central bank to enact a second reduction in one of its key interest rates within a span of three months.
The People’s Bank of China (PBOC) has announced a lowering of its one-year loan prime rate from 3.55% to 3.45%.
China’s recovery from the Covid-19 crisis has encountered challenges stemming from a property market downturn, declining exports, and sluggish consumer spending.
In contrast to China’s actions, other major economies have taken steps to raise interest rates to combat mounting inflation.
This recent rate adjustment follows a previous reduction of the one-year rate in June, a move that influences the majority of household and business loans in the country.
While analysts anticipated a potential decrease in the five-year loan prime rate – a benchmark for mortgages – it remained unchanged at 4.2%.
Surprisingly, the central bank also cut short and medium-term rates last week.
Catherine Yeung, Investment Director at Fidelity International, suggested that additional rate cuts might be introduced in conjunction with government expenditures and targeted measures aimed at stabilizing the property market. However, officials will be cautious of the potential long-term repercussions of such policies as they seek to restore economic confidence.
China’s economic trajectory has been marred by significant challenges since the pandemic-induced global shutdown. The turmoil in the property sector was underscored by the bankruptcy protection filing by Evergrande, a beleaguered real estate conglomerate.
The company’s financial strain has prompted ongoing negotiations with creditors for a substantial financial arrangement.
In tandem, another major property developer, Country Garden, disclosed the possibility of recording a loss of up to $7.6 billion for the initial six months of the year.
Amid these issues, China experienced its first deflation in over two years as its official consumer price index slipped by 0.3% in the past month compared to the previous year.
Furthermore, China’s trade dynamics were impacted in July, with both imports and exports experiencing sharp declines due to weaker global demand, thereby challenging the nation’s recovery prospects.
Concurrently, Beijing’s decision to discontinue the release of youth unemployment data, which had previously provided insights into the country’s economic slowdown, has drawn attention. Notably, the unemployment rate among 16 to 24-year-olds in urban areas reached a record high of over 20% in June.
