SINGAPORE—China’s economic malaise has pushed policymakers and state-owned banks to attempt an escalating series of remedies. Their latest attempt: A surprisingly aggressive cut to a key lending rate.
The People’s Bank of China said Tuesday that China’s major banks reduced the five-year loan prime rate, a benchmark for home loans, to a new low of 3.95%, from 4.2% previously. It was the largest cut since the rate was introduced five years ago, and a much bigger reduction than economists had expected.
The move was another step in China’s broad campaign to prop up a crumbling housing market and support an economy battling deflation, slowing exports and moribund consumer confidence.
Investors reacted to the news with a shrug. China’s benchmark CSI 300 index was slightly lower in morning trading, while the Shanghai Composite Index was barely changed. China’s stock market is in a yearslong slump, as foreign investors have shifted elsewhere and small investors in the country have lost their nerve.
The rate cut wasn’t wholly unexpected. A newspaper associated with China’s central bank floated the possibility of lower rates for borrowers on Sunday. It came on the heels of a cut to the amount of reserves banks are required to hold against their deposits last month, as well as an easing of restrictions on home purchases and other housing-friendly moves late last year.
While the interest-rate cut is helpful, economists say that what the economy really needs is a step-up in government spending to jolt growth and a more forceful effort to bring China’s drawn-out real-estate crunch to a close.
Beijing, though, is reluctant to add to China’s heavy debts with a major stimulus program and is determined to wring the excesses out of a property market that at its peak accounted for around a quarter of China’s annual economic output.
The upshot is that analysts expect another subpar economic performance this year—and likely slower growth for years to come as the authorities attempt to engineer a shift in the economy away from an overreliance on real-estate and toward high-end manufacturing and consumption.
Most economists had expected the five-year loan prime rate to be cut by 0.05 or 0.10 percentage point. The last time the five-year rate was trimmed was in June.
The PBOC’s rate-cutting stance contrasts with other major central banks, which tightened policy aggressively last year to tame rocketing inflation.
Economists said the cut should provide some support to the housing market though overall demand for loans is still subdued. Some think China’s central bank could still go further in nudging banks to reduce borrowing costs. Another benchmark rate, the one-year loan prime rate, was left unchanged Tuesday, at 3.45%.
But central-bank officials have telegraphed that they are less interested in juicing credit growth than they are in diverting credit toward manufacturing and other favored sectors, reflecting concerns over the lingering risk of reflating a bubble in property as well as the threat of capital flight and a weaker currency.
“The PBOC remains reluctant to embrace the sizeable and broad-based rate cuts needed to drive a strong acceleration in credit growth and therefore economic activity,” said Julian Evans-Pritchard, head of China economics at Capital Economics in Singapore.
China’s economy expanded 5.2% in 2023, a speedier pace than it achieved in 2022 but still one of the weakest growth rates in decades, excluding the troubled years of the pandemic.
Growth this year is expected to be slower still, now that the tailwind from reopening after ditching draconian Covid-19 restrictions has dissipated.
The International Monetary Fund expects China’s economy to expand 4.6% in 2024, and 4.1% next year. As well as its real-estate troubles, China’s economy is also grappling with weakening demand for its exports and subdued consumer spending.
More Chinese travelers hit the road during the February Lunar New Year holiday than ever before, new data showed this week, but spending per person was lower than it was in 2019, according to Goldman Sachs.
Other data Sunday showed home sales tanking further across major cities in the first six weeks of the year when compared with a year earlier, while new data on China’s balance of payments with the rest of the world showed direct investment by foreign firms rose last year by the smallest amount since at least 1998.
One particularly thorny problem is deflation. Consumer prices fell in January at their steepest pace in 14 years, while producer prices have fallen every month for more than a year. Economists fret that without more aggressive government and central bank support to rekindle growth, China could slip into a rut of falling prices that becomes harder to reverse the longer it lasts.
Grace Zhu in Beijing contributed to this article.
Write to Jason Douglas at [email protected]
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