China cuts two other key lending rates as economy falters

The People’s Bank of China cut two other key interest rates on Tuesday for the first time in 10 months to boost growth in the world’s second-largest economy.

The Chinese central bank cut the one-year loan prime rate by 10 basis points from 3.65% to 3.55%, and cut the five-year loan prime rate by 10 basis points from 4.3% to 4, 2%, for the first time since August.

“On their own, 10bp cuts are too small to make much of a difference to monetary conditions, especially as interbank market rates are already below policy rates,” Julian Evans-Pritchard and Zichun Huang of Capital Economics.

“But the PBOC tends to use policy rate changes as a signaling tool, and the heavy lifting is done by other tools, such as adjustments to reserve requirements and bank loan quotas,” they added. “The latest round of rate cuts suggests that these tools will also be implemented.”

One gauge of Hong Kong-listed Chinese developers, the Hang Seng Mainland Property Index, fell more than 3%, with Country Garden slipping around 5%. About half of the participants in a Reuters poll had forecast a deeper cut of at least 15bp to the five-year rate.

Losses in the property sector weighed on stock benchmarks on the mainland and Hong Kong, while the Chinese yuan onshore and offshore traded at its lowest level since late November.

The latest rate cut comes on the heels of two monetary easing moves last week. Last Thursday, the PBOC cut its one-year medium-term credit line for the first time in 10 months, and lowered its reverse repurchase rate to seven days Monday of last week.

Most household and corporate loans in China are based on the PBOC’s one-year prime lending rate, while mortgages are linked to the five-year rate.

Tuesday’s move was widely expected after a large amount of economic data in in recent weeks, from industrial production and fixed asset investment to retail sales and trade in May, it fell short of expectations. china seems to be teetering on the brink of deflation as reopening optimism fades.

Major investment banks, including Goldman Sachs and JPMorgan, recently cut their full-year GDP estimates for China and warned of headwinds ahead.

On Friday, China’s State Council promised implement “stronger measures” in a timely manner to “increase the momentum of economic development, optimize the economic structure, and promote the sustained recovery of the economy.”

“Broader policy statements, including the reading from Friday’s State Council meeting, make it clear that officials are increasingly concerned about the economy and that supporting growth now takes precedence over other concerns, including those related to bank profitability,” added Evans-Pritchard and Huang. .