China cuts main interest rate as economic recovery fizzles out

By Laura He, CNN

Hong Kong (CNN) — China’s central bank has cut its main benchmark lending rates for the first time in 10 months, in its latest effort to bolster growth as the world’s second largest economy falters.

The rate cuts come as Wall Street banks, including Goldman Sachs, slash their forecasts for China’s economy. Goldman said on Sunday that the recovery sparked by the country’s post-Covid reopening appeared to have “fizzled out” in the second quarter as it downgraded its forecast for growth this year to 5.4% from 6%.

The People’s Bank of China on Tuesday trimmed its one-year loan prime rate (LPR) by 10 basis points from 3.65% to 3.55%, and reduced the five-year rate by the same margin to 4.2%. The cuts follow reductions in other interest rates last week.

The LPR sets the interest that commercial banks charge their best clients, and serves as the benchmark for household and corporate lending. The one-year rate affects most new and outstanding loans, while the five-year rate influences the pricing of longer term loans, such as mortgages.

This is the first time the PBOC has cut both LPR rates since August 2022, when renewed Covid lockdowns and a deepening property downturn were pummeling the economy.

But analysts said the central bank’s efforts Tuesday and last week didn’t go far enough.

“The 10 bps rate cut[s] are unlikely to stimulate business confidence and housing demand,” said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.

“We reckon that a bold stimulus package covering fiscal policy and supporting measures in property markets are needed to revive market confidence on China’s recovery,” he added.

Hong Kong and mainland Chinese stocks slid after Tuesday’s rate cuts. The Hang Seng (HSI) Index declined 1.7%, and the Shanghai Composite dropped 0.5%. They underperformed other markets in the region.

“This move is in line with our expectations, but might be disappointing for some forecasters who expected a deeper cut of at least 15 [basis points] to the 5-year LPR,” Goldman Sachs analysts wrote in a note on Tuesday.

“We continue to expect further policy easing measures to be announced in the next few weeks, especially on fiscal, housing and consumption, although the magnitude of stimulus should be smaller than in previous easing cycles.”

Property investment declined 7.2% in the first five months of 2023, worse than the 6.2% drop recorded in the January-to-April period, according to official data released last week.

The slowdown is also evident in many other sectors.

Factory activity slumped in May to its weakest level since the country ended its zero-Covid policy in December, according to a government survey released at the end of last month.

Customs statistics showed separately that exports fell 7.5% in May from a year ago, the biggest decline since January, as manufacturers struggled to find demand abroad amid slowing global growth.

Data on retail sales, industrial output, and investments released by the National Bureau of Statistics last week all missed market expectations.

The most concerning issue for policymakers is likely to be the persistently high unemployment rate.

The jobless rate for 16 to 24-year-olds increased to 20.8% last month, shattering the previous record set in April.

More than 6 million people in that age group were unemployed in May, said Fu Linghui, a spokesperson for the NBS, at a press conference in Beijing last week.

The-CNN-Wire
™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.