China cuts interest rates in effort to boost flagging economic growth

Chinese commercial banks cut interest rates on Tuesday as Beijing looks for ways to boost economic growth, which has been disappointingly sluggish as the country recovers from pandemic-era lockdowns and on-chain bottlenecks. of supply.

The move came just days after China’s central bank announced it would cut the interest rate it charges at several different facilities it uses to supply commercial banks with cash.

The change in commercial bank prime rates, which are offered to borrowers with the best credit, was relatively modest. The one-year loan rate fell from 3.65% to 3.55%, while the five-year loan rate dropped from 4.3% to 4.2%.

striking a balance

The change, which was the most significant adjustment to interest rates in nearly a year, was smaller than some analysts had expected. China faces continued weakness in its real estate sector, high debt levels and persistently slow growth.

David Qu, an economist who covers China for Bloomberg Economics, said on Bloomberg TV that the small rate cut was an effort to maintain what he called a “balance between stabilizing the housing market and avoiding stimulating another bubble in the housing market.” .

In an analysis published last week after the People’s Bank of China signaled rate cuts were coming, Rhodium Group’s Logan Wright and Allen Feng wrote: “[L]Reductions in mortgage rates won’t have much of an impact on property sales, but may help reduce the mortgage payment burden for Chinese households. This is more likely designed to boost household consumption so that households can free up and use debt service for other purposes.”

Lower growth is expected

Concerns about China’s economy have worsened in recent months, a fact that Beijing’s top leaders have begun to publicly acknowledge.

Chinese state television reported on Friday that Premier Li Qiang told a meeting of senior Communist Party leaders that the government is exploring ways to boost growth.

“The external environment is becoming more complex and severe, and the slowdown in world trade and investment will directly affect the recovery process of our country’s economy,” Li said.

Over the weekend, Goldman Sachs Group Inc. lowered its forecast for growth in China this year to 5.4% from 6%.

The growth rate of the Chinese economy remains significantly higher than that of many developed economies, including the US, which the International Monetary Fund expects to grow by just 1.6% in 2023. However, the rate China’s growth rate reached 7.8% 10 years ago. and it has mostly slowed since then, with the exception of an anomalous 8.1% rate in 2021 when it returned from the depths of the pandemic.

More incentives are expected

After reports last month that industrial production and retail sales had been below expectations, some experts expected the Chinese government to engage in a careful targeted economic stimulus program in the near future. The problem is that some of the more obvious levers of influence may be less powerful than in the past.

For example, lower interest rates are generally viewed as encouraging because they encourage borrowing to finance capital investment. However, debt levels among Chinese companies are already quite high, which will serve to curb demand for more credit.

In recent months, Chinese officials have pointed to opening the country to foreign investment as another means of boosting economic growth.

However, this comes after a period in which Beijing’s aggressive crackdown on Chinese tech companies and high-profile visits by state security officials to the Chinese offices of Western companies have left some companies wary.

In April, security officials entered the offices of the consulting firm Bain & Company and questioned the employees. That visit came a month after officials entered the offices of another US company, Mintz Group, and detained five Chinese nationals who worked there.

global challenges

The change in interest rates comes amid a series of important discussions between China and other major economies around the world.

On Monday, US Secretary of State Antony Blinken visited Beijing, where he met with Chinese Foreign Minister Qin Gang and then President Xi Jinping. Both sides characterized the discussions as productive, but on issues of great economic concern to Beijing, no progress was announced.

These included the Biden administration’s continued application of sweeping tariffs on Chinese goods implemented by the administration of former President Donald Trump, and severe restrictions on China’s ability to purchase state-of-the-art semiconductors due to bans put in place by the Biden administration.

On Tuesday, Li traveled to Germany to meet senior officials there. Germany, which counts China as its second-biggest trading partner after the European Union, saw its economy falter after Russia’s invasion of Ukraine exposed its overreliance on Russia as a source of fossil fuels.

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