MercoPress. South Atlantic News Agency

China concerned about a slowing economy cuts lending rates to boost consumption

The People’s Bank of China, PBOC, cut the one year loan prime rate by ten basis points from 3.8% to 3.7%.

The Chinese economy expanded 8,1% in 2021, following the 2,2% of 2020, as steadily growing industrial production and exceptional trade performance offset a drop in retail sales. Still, that figure fell short of economists' expectations for an 8.4% growth and year on year growth rate fell to 4,9% in the third quarter and 4% in the fourth quarter.

It should not come as a surprise then that China’s central bank cut its benchmark lending rates again last week amid concerns about an economic slowdown in the world’s second-largest economy.

The People’s Bank of China, PBOC, cut the one year loan prime rate by ten basis points from 3.8% to 3.7%. The five-year loan prime rate was lowered by 5 basis points from 4.65% to 4.6% — it was the first cut since April 2020, at the height of the coronavirus pandemic in the country.

Loan prime rates (LPR) affect the lending rates for corporate and household loans in the country. Most new and outstanding loans in China are based on the one-year LPR, but the five-year rate influences the pricing of home mortgages.

The rate cuts continue the PBOC’s efforts to push down borrowing costs, according to Capital Economics.

“Mortgages will now be slightly cheaper which should help shore up housing demand. The PBOC has already pushed banks to increase the volume of mortgage lending,” Sheana Yue, China economist at the firm, said in a note following the announcement.

However, Nomura’s Chief China Economist Ting Lu said the impact of the LPR cuts “will be quite limited, as these cuts are too small to have a material impact.”

“They are unlikely sufficient to clear up the real bottlenecks, and because rates on existing mortgage loans will not be reset this year,” he wrote.

Nomura expects further cuts to the one-year and five-year LPR as well as the reserve requirement ratio, and a “significant rise in FX purchases to add liquidity and limit Yuan appreciation over the next few months.”

Though China was the first major economy to shake off most of its pandemic-driven economic shock, concerns grew last year around the sustainability of growth. They came as a result of muted consumer spending, tighter regulations, a struggling property sector as well as Beijing’s zero-tolerance Covid policy.

On Monday, the central bank lowered borrowing costs of medium-term loans for the first time since April 2020. The PBOC said it was reducing the interest rate on 700 billion Yuan (US$110.33 billion) worth of one-year medium-term lending facility loans by 10 basis points from 2.95% to 2.85%.