China’s central bank cuts prime interest rates on loans
China’s central bank cut key interest rates on Tuesday for loans issued by the state-controlled banking system, in the clearest sign yet of growing concerns in the Chinese government and corporate sector that the country’s economy is stalling.
The interest rate cut was small — a tenth of a percentage point for the country’s benchmark one- and five-year interest rates for loans. But because almost all of the country’s business loans and mortgages are linked to the two interest rates, the reductions may have some effect on the overall pace of economic growth.
The move by the central bank, the People’s Bank of China, puts China at odds with the policies of the West. The Federal Reserve spent over a year fighting inflation by raising interest rates before pausing this month. The European Central Bank has also pushed up interest rates in response to inflation.
But China has the opposite problem: Private sector spending and investment are so weak that companies have been competing with each other to cut prices to keep customers. Consumer and producer prices fell in the four months to May.
Investors were overwhelmed by the central bank’s rate cut, and share prices in Hong Kong and Shanghai fell on Tuesday. The rate cut was slightly less than many investors had hoped for and provided a reminder that the Chinese economy is struggling.
China’s currency, the renminbi, also weakened against the dollar. In recent months, lower interest rates in China than in the US have created an incentive for companies and households in China to move their money out of the country, working around China’s strict restrictions on large overseas transfers of funds.
Cutting interest rates is slow-acting medicine for the Chinese economy, said Han Shen Lin, a former vice president for China at Wells Fargo Bank who now teaches finance at New York University in Shanghai. Companies usually negotiate once a year with the banks about the loan limit, and then take out loans for anywhere from a few weeks to several months. Only when new loans are granted, or existing loans are rolled over, is the lower interest rate used.
The central bank’s tapering on Tuesday “will seep through the system, but only gradually,” Lin said.
Households have to wait even longer to benefit. Mortgage interest rates are almost always adjustable in China. But the adjustment often happens in January, China’s central bank said on Tuesday, in a statement accompanying the announcement of the rate cut.
So while people buying homes in the next few months may benefit from the new cuts, many homeowners will have to wait longer.
The move on Tuesday was the first reduction in lending rates from China since August, when the country’s economy was still struggling after a two-month Covid shutdown in Shanghai. The latest cuts send the message that Beijing wants to stabilize output while exports are falling, construction has stagnated and consumer confidence is weak. The government’s abrupt abandonment of Covid controls at the end of last year had spurred hopes that China’s economy would bounce back.
The modest scale of the rate cuts suggests concern among China’s economic policymakers, but not panic. By contrast, when the global financial crisis gathered pace in late 2008, China’s central bank cut its benchmark interest rates for loans and deposits by 1.08 percentage points in a single day. And during the Asian financial crisis of the late 1990s, China cut lending rates by 1.44 percentage points in one day.
Tuesday’s cut brought the benchmark one-year interest rate to 3.55 percent from 3.65 percent. Companies usually pay the benchmark rate plus one or more percentage points, with smaller companies and private enterprises paying more than large companies and state-owned enterprises.
The five-year interest rate, used as a reference for determining mortgage interest rates, was cut to 4.2 per cent from 4.3 per cent. Home buyers and home owners often pay an additional percentage point above this level.
