China’s central bank has cut one of its key lending rates but left another unchanged, surprising economists who had expected more forceful action to support economic growth amid widespread concerns over its path.
The world’s second-largest economy is in the midst of a slowdown, and has slipped into deflation with prices falling year on year as slowing domestic spending weighs on the country’s post-Covid economic recovery.
The Chinese property industry is also in crisis, as the slowdown exposes overextended developers. Evergrande Group, once China’s leading property developer, filed for bankruptcy protection in the US on Friday as it tried to restructure its large debts.
The People’s Bank of China (PBoC), the central bank, has responded by cutting interest rates, but its latest move on Monday surprised economists, who had been expecting a bigger change.
China trimmed its one-year loan prime rate, which is mainly used as the benchmark for corporate lending, from 3.55% to 3.45%, but left its five-year equivalent, mainly used to price mortgages, at 4.2%. Economists polled by Reuters had expected both rates to be cut, with a 0.15 percentage point reduction to both the central prediction.
The central bank had surprised the market last week with a 0.15 percentage point decrease in its medium-term lending facility, a rate at which it lends to some banks. That was expected to push borrowing costs lower throughout the economy.
Julian Evans-Pritchard and Zichun Huang, economists at the consultancy Capital Economics, said China was trying to balance efforts to stimulate the economy with concerns about the health of its banks.
“The big picture is that the PBoC’s approach to monetary policy is of limited use in the current environment and won’t be enough, on its own at least, to put a floor beneath growth,” they wrote. “Reviving demand would take much larger rate cuts, or regulatory measures to effectively restore confidence in the housing market.”
The pressures on the Chinese economy have been particularly evident in the property sector. As well as the heavily indebted Evergrande, its rival developer Country Garden is at risk of missing repayments on some of its borrowing, threatening the future of housing projects across China for which many households have already made payments.
George Magnus, an author of several books on China’s economy and an associate at Oxford University’s China Centre, said the instability in the property market – about a quarter of the country’s economy – could threaten financial stability and prompt social problems if developers cannot deliver pre-sold housing.
“For the last 10 or 20 years, the market has been propped up by the government, and by official actions,” he said on the BBC Radio 4’s Today programme. “Every time the economy was weak there was borrowing to finance real estate construction and infrastructure. So this insulation of the property market from corrections is really just coming home to roost now.”
