PBOC slashes key rate amid economic woes

China’s central bank has implemented a reduction in a crucial interest rate, citing concerns surrounding the post-pandemic resurgence of the world’s second-largest economy.

On Monday, the People’s Bank of China lowered the one-year loan prime rate, a pivotal gauge for corporate loans, from 3.55 percent to 3.45 percent.

In contrast, the central bank maintained the five-year LPR, a metric employed to establish mortgage pricing, at a stable rate of 4.2 percent.

China’s rebound following the COVID-19 pandemic has encountered obstacles due to waning demand for Chinese products in light of global economic uncertainties. Furthermore, domestic challenges, including a declining property market and historically low birth rates, have added to the hurdles.

Growing apprehension about potential debt default by property giant Country Garden has heightened worries of a potential contagion within China’s financial system, following the noteworthy default of major developer Evergrande, which faced over $300 billion in debt defaults in 2021.

In a recent development, China also made the announcement that it would cease publishing comprehensive statistics on youth unemployment, subsequent to a spike in the jobless rate to 21.3 percent in June.

The rate cut on Monday was met with disappointment among certain market analysts, who had been anticipating more impactful measures to invigorate the economy.

On the day of the rate cut, Hong Kong shares experienced a dip of 1.4 percent, while the Shanghai stock market saw a decrease of 0.6 percent.

Masayuki Kichikawa, Chief Macro Strategist at Sumitomo Mitsui DS Asset Management, noted to Reuters that “China might have restricted the extent of the rate cuts due to concerns regarding potential depreciation of the yuan. The Chinese authorities are evidently committed to upholding currency market stability.”

Goldman Sachs economist Maggie Wei expressed dissatisfaction with the LPR reduction, characterising it as “disappointing” and suggesting it would not contribute to instilling confidence as Chinese authorities strive for economic recovery.

Wei cautioned that the move “could even have adverse effects if market participants perceive these easing measures as indicative of policymakers being hesitant to introduce even modest policy stimuli.”

Last week, Beijing acknowledged existing economic “challenges” but criticised Western observers for doubting the nation’s growth prospects.

Wang Wenbin, a spokesperson from the Ministry of Foreign Affairs, asserted, “In the end, they will undoubtedly be proven incorrect,” while addressing queries on China’s economic trajectory.