By
Steve Muchoki
November 28th, 2023
Market observers had also anticipated an adjustment in the five-year loan prime rate, influencing the country’s mortgage landscape.
Amidst mounting economic concerns, the People’s Bank of China (PBOC) recently implemented changes to its lending rates, signaling its response to a complex landscape of financial issues. On August 21, the PBOC made a measured reduction of 10 basis points in its one-year loan prime rate. The new rate is now set at 3.45% from 3.55% as the nation grapples with financial challenges ranging from a property market downturn to diminished export activities and sluggish consumer spending.
The central bank’s decision to cut its 1-year rates goes against the global trend where other countries have taken steps to counter high inflation by raising rates instead of reducing them. However, the latest move makes it the second time the PBOC has cut its 1-year rate in three months.
China’s Five-year Rates Remains Unchanged
According to reports, Jun Bei Liu, an expert at Tribeca Investment Partners, said that while this move might not exert a seismic impact on China, it does reflect the Chinese government’s commitment to invigorating the economy.
“A more substantial stimulus package will be needed to instill confidence and subsequently spur consumption and growth. Without it, the economy’s risk of slipping into deflation grows, making recovery more challenging,” Liu said.
Market observers had also anticipated an adjustment in the five-year loan prime rate, influencing the country’s mortgage landscape. However, this rate remained unchanged at 4.2%, differing from economists’ expectations.
“The underwhelming LPR announcement strengthens our view that the PBOC is unlikely to embrace the much larger rate cuts that would be required to revive credit demand,” Julian Evans-Pritchard, Capital Economics’ head of China, wrote in a note.
Furthermore, the PBOC made unexpected modifications to short and medium-term rates, indicating a dynamic approach to policy-making.
Catherine Yeung, Investment Director at Fidelity International, said there is a possibility of additional rate cuts coinciding with government expenditures and targeted strategies to support the property market. While the focus is on restoring economic confidence, policymakers are likely mindful of the longer-term implications of their decisions.
Chinese Economic Turmoil Deepens as Evergrande Files for Bankruptcy
China’s economic journey since the pandemic has been marred by a series of formidable hurdles, with the global shutdown casting a shadow over its recovery efforts.
After embattled real estate behemoth Evergrande sought bankruptcy protection in the US, a spotlight was recently cast on the nation’s property sector. Last week, the property giant officially filed for bankruptcy after having accumulated debts exceeding $300 billion (£235 billion). Due to its massive debt, the company was the most heavily indebted property developer globally.
Another major property developer, Country Garden, warned of potential losses totaling up to $7.6 billion for the year’s first half.
The economic landscape in China has become more complex as official data signaled China’s plunge into deflation for the first time in over two years, with the consumer price index falling by 0.3% compared to the previous year. Furthermore, the figures painted a picture of steep declines in imports and exports in July, as weakened global demand threatened China’s recovery prospects.
Simultaneously, the discontinuation of releasing youth unemployment statistics, which had been a critical gauge of the country’s economic health, fueled discussions about China’s deceleration. In June, the unemployment rate for young individuals aged 16 to 24 in urban areas surged to an unprecedented level exceeding 20%.
