China’s central bank cut key interest rates on Tuesday on loans issued by the state-controlled banking system, in the clearest sign yet of growing concern in China’s government and corporate sector that the country’s economy is slowing.
The interest rate cut was small – a tenth of a percentage point of the country’s standard one- and five-year interest rates on loans. But since nearly all of the nation’s corporate and mortgage lending is pegged to the two rates, the cuts may have some impact on the overall pace of economic growth.
The move of the central bank, the People’s Bank of China, puts China at odds with the policies pursued in the West. The Federal Reserve spent more than a year fighting inflation by raising interest rates before it stopped this month. The European Central Bank also raised interest rates in response to inflation.
But China has the opposite problem: Private spending and investment are so weak that companies are competing with each other to lower prices to keep customers. Consumer and producer prices declined for the four months through May.
Investors were stunned by the central bank’s rate cuts, with share prices in Hong Kong and Shanghai falling on Tuesday. The rate cut was a bit smaller than many investors had hoped and provided a reminder that the Chinese economy is struggling.
China’s currency, the renminbi, has also weakened against the dollar. In recent months, lower interest rates in China compared to the United States have created an incentive for businesses and households in China to move their money out of the country, overcoming China’s strict restrictions on large overseas transfers of funds.
Lowering rates are slow-acting medicine for the Chinese economy, said Han Xinlin, a former deputy general manager for China at Wells Fargo Bank who is now studying finance at New York University in Shanghai. Usually once a year, companies negotiate a borrowing limit with their banks, and then take out loans from anywhere from two weeks to several months. Only when new loans are made, or existing loans are renewed, is the lower rate of interest applied.
Lin said Tuesday’s central bank cut “will seep through the system, but only gradually.”
Families will need to wait longer to benefit. Mortgage rates are always adjustable in China. But China’s central bank said on Tuesday that the adjustment most often occurs in January, in an explanatory statement that accompanied the announcement of the rate cut.
So while people who buy homes in the next few months may benefit from the new discounts, many homeowners will need to wait longer.
Tuesday’s move was the first cut in loan rates by China since August, when the country’s economy was still struggling after a two-month Covid lockdown in Shanghai. The latest cuts send the message that Beijing wants production to stabilize while exports slump, construction stagnates, and consumer confidence is weak. The government’s abrupt abandonment of Covid controls at the end of last year raised hope for a resurgence in the Chinese economy.
The modest scope of rate cuts suggests that China’s economic policymakers are worried, but not panicked. With the acceleration of the global financial crisis in late 2008, by contrast, China’s central bank cut interest rates on loans and deposits a record 1.08 percentage points in one day. During the Asian financial crisis in the late 1990s, China cut loan rates by 1.44 percentage points in one day.
Tuesday cut the benchmark interest rate for one year to 3.55 percent from 3.65 percent. Corporations typically pay the standard rate plus 1 percentage point or more, while smaller firms and private sector firms pay more than large corporations and state-owned firms.
The five-year rate, used as a benchmark for setting mortgage rates, was lowered to 4.2 percent from 4.3 percent. Homebuyers and homeowners often pay another percentage point above that level.
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