Another Rate Cut In China As Economic Recovery Falters

China's central bank took anticipated measures on Tuesday (20 June) by reducing key lending rates, including a benchmark tied to mortgages.

This move aims to stimulate investment and consumption following a slowdown in the country's post-Covid pandemic recovery over the past five months.

After their monthly meeting, the People's Bank of China (PBOC) lowered the one-year loan prime rate by 10 basis points from 3.65 per cent to 3.55 per cent.

Simultaneously, they trimmed the five-year rate by 10 basis points from 4.3 per cent to 4.2 per cent. These adjustments will result in reduced borrowing costs for both companies and households.

The PBOC's previous rate reduction occurred in August of last year when the economy faced the impact of a two-month Covid-19 lockdown in Shanghai.

China experienced a slowdown in key economic indicators such as industrial production and retail spending during April and May, following better-than-expected 4.5 per cent growth in the first quarter of the year.

In May, the youth unemployment rate reached a record high of 20.8 per cent and real estate investment contracted by 7.2 per cent.

The majority of new and outstanding loans in China are based on the one-year loan prime rate, while the five-year rate influences mortgage pricing.

The property sector is currently facing challenges due to numerous unfinished housing projects caused by developers overwhelmed with debt.

In addition to the rate cuts, the Chinese central bank also lowered the rate on medium-term lending facility loans to select banks by 10 basis points, from 2.75 per cent to 2.65 per cent.

Furthermore, they reduced the seven-day reverse repo rate, which is the key rate for short-term liquidity provision to banks, from 2 per cent to 1.90 per cent last week.