Aug. 21 (UPI) — China announced a surprise split-interest rate decision Monday, cutting the prime loan rate in a bid to stimulate the economy, but left the cost for mortgage lending unchanged, possibly to shield banks from an earnings shock.
The People’s Bank of China shaved 0.15% off the 1-year rate for household and business loans reducing it from 3.55% to 3.45%, the second cut in three months, amid a slowdown in GDP growth and weak economic data overall from falling exports and lackluster consumer spending to a property slump.
The central bank left the prime rate for 5-year loans against which most mortgages are pegged, unchanged at 4.2% but when it last cut in June, both the 5-year and 1-year rates were reduced by 10 basis points.
Last week, short and medium-term rates were also cut by 10 and 15 basis points, with analysts predicting further cuts, government spending announcements and measures to support real estate.
GDP growth slowed to 0.8% in the second quarter compared with 2.2% in the January to March period, although the economy was still 6.3% larger than it was in the second quarter of 2022 due to the re-opening of the economy after three years of COVID-19 restrictions and lockdowns.
Exports were down 14.5% in July compared with July 2022, following a 12.4% drop in June, with exports to the United States and European Union down by more than a fifth. Factory output also fell, contracting for the fourth straight month while the fall in real estate investment gathered pace.
The National Bureau of Statistics said last week that investment in the sector fell by 8.5% in the seven months to July, slowing to $943.5 billion, as falling sales hit developers’ cash holdings with residential housing accounting for most of the decline.
Data in the same release showed the economy flirting with deflation with Consumer Price Inflation falling by 0.3% in July, compared with June, in contrast to most of the world’s major economies which are battling with inflation.
Deflation is almost as bad because consumers and businesses put off purchases if they believe prices will be lower in the future, with serious knock-on impacts to economic growth.
The latest data made no mention of youth unemployment after reporting a jobless rate of more than 20% for 16 to 24-year-olds in urban areas in June, the sixth consecutive monthly increase.
Monday’s rate cut is unlikely to have a major impact but did demonstrate the government’s determination to turn around the economy, Tribeca Investment Partners’ Jun Bei Liu told the BBC.
“We will need bigger stimulus package to boost confidence and in turn drive up consumption and growth. Without it, the economy is risking faltering into deflation which will be harder to revive,” she added.
Chinese regulators pledged more support Sunday to stabilize the country’s faltering real estate sector as officials in South Korea attempted to quell fears the crisis would spread to the Korean peninsula.
The People’s Bank of China, the National Financial Regulatory Administration and the China Securities Regulatory Commission released a joint confidence-boosting statement vowing to strengthen credit support to tackle skyrocketing local government debt and the property sector situation.
