On Thursday, China intensified its efforts to rejuvenate its economy by reducing a key policy rate and the interest paid on bank deposits.
This announcement came amid a global stock market downturn, further extending the losses in Chinese markets, which have experienced declines this year while share prices in many other countries have risen.
By midday, Hong Kong’s Hang Seng index had dropped by 1.4%, while the Shanghai Composite index saw a 0.4% decrease.
The People’s Bank of China announced a significant cut in the lending rate for one-year medium-term policy loans, reducing it by 20 basis points to 2.3%. This is the largest rate cut since the economy was hit hard by the COVID-19 pandemic in 2020. The rate on 7-day loans was also reduced to 1.7%.
Major state-owned banks also lowered deposit rates to ease financial pressures. The rate on one-year fixed deposits was cut by 10 basis points to 1.35%, according to the official Xinhua News Agency, which cited the “Big Four” banks: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank. While these lower deposit rates may benefit bank balance sheets, they are unlikely to encourage consumer spending, which is crucial for reviving growth that has been declining for years and was further impacted by a downturn in China’s property sector.
“With banks already passing on lower deposit rates to savers, this will not encourage spending in the current environment. Instead, people may save even more to achieve the same returns they were previously earning,” RaboResearch commented.
Economic growth in China, the world’s second-largest economy, slowed to 4.7% in the last quarter, down from 5.3% in January-March.
Earlier this week, the central bank reduced several other lending rates, maintaining a cautious approach to stimulating the economy. This flurry of rate cuts followed a major policy-setting meeting of the ruling Communist Party last week. The meeting outlined ambitious plans for economic reforms but did not specify any stimulus plans driven by government spending. Instead, the party chose to focus on fine-tuning.
The planning meeting emphasized long-term goals while also highlighting short-term targets, according to Nicholas Yeo of abrdn (formerly Standard Life Aberdeen plc). “This was unusual, but positive, as it could indicate the authorities’ growing awareness of the need to address the country’s lagging economic growth,” Yeo stated in a report.
Thursday’s rate cut also eases pressure in the bond market, as the central bank has reduced collateral requirements for its medium-term lending facility, allowing lenders to sell bonds typically used as collateral.
