Global Courant
China’s central bank cut key interest rates on loans issued by the state-controlled banking system on Tuesday, a clear sign so far of rising concerns among the Chinese government and business that the country’s economy is stalling.
The rate cut was small — one-tenth of a percentage point for the country’s benchmark interest rates on one-year and five-year loans. But because nearly all of the country’s corporate loans and mortgages are tied to the two rates, the cuts could 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 policy in the West. The Federal Reserve battled inflation for more than a year by raising interest rates before stopping earlier this month. The European Central Bank has also raised interest rates in response to inflation.
But China has the opposite problem: Private sector spending and investment are so weak that companies are competing to lower prices to retain customers. Consumer and producer prices actually fell during the four months to May.
Investors were impressed by the central bank’s rate cuts. Stock prices fell across much of Asia on Tuesday, particularly Hong Kong. The rate cut was slightly smaller than many investors had hoped and was a reminder that China’s economy is struggling.
The Chinese currency, the renminbi, also weakened against the dollar. In recent months, lower interest rates in China than in the United States have created an incentive for businesses and households in China to move their money out of the country, circumventing China’s tight restrictions on large overseas remittances.
Cutting rates is a slow-acting medicine for China’s economy, said Han Shen Lin, a former deputy general manager for China at Wells Fargo Bank who now teaches finance at New York University in Shanghai. Businesses typically negotiate their borrowing limits with their banks once a year and then take out loans for periods ranging from a few weeks to several months. The lower interest rate is only applied if new loans are taken out or existing loans are rolled over.
The central bank cut on Tuesday “will seep through the system, but only gradually,” said Mr. Lin.
Households will have to wait even longer to benefit. Interest rates on mortgages are almost always adjustable in China. But the adjustment often happens in January, China’s central bank said Tuesday in a comment announcing the rate cut.
So while people buying homes in the coming months may benefit from the new cuts, many homeowners will have to wait longer.
Tuesday’s move was China’s first loan rate cut since last August, when the country’s economy was still struggling after a two-month Covid lockdown in Shanghai. The latest cuts send a signal that Beijing wants to stabilize production at a time when exports are declining, construction is stagnating and consumer confidence is weak. The government’s abrupt halt to Covid controls late last year had raised hopes that China’s economy would recover.
The modest size of rate cuts signals concern among Chinese economic policymakers, but not panic. In contrast, as the global financial crisis gathered momentum in late 2008, China’s central bank cut its benchmark lending and deposit rates by 1.08 percentage points in one day. And during the Asian financial crisis in the late 1990s, China cut lending rates by 1.44 percentage points in one day.
Tuesday’s cut took the benchmark one-year rate from 3.65 percent to 3.55 percent. Companies typically pay the benchmark rate plus one or more percentage points, with smaller and private sector companies paying more than large and state-owned companies.
The five-year interest rate, used as a benchmark for determining mortgage rates, was lowered from 4.3 percent to 4.2 percent. Homebuyers and homeowners often pay another percentage point above that level.
