China’s Central Bank Cuts Key Rates As Economic Slump Deepens

The People’s Bank of China surprised the markets by lowering a key rate in 2022 to help the economy grow.

The central bank reduced the rate on its one-year medium-term lending facility (MLF) loans by 10 basis points, from 2. 85 to 2. 75 percent. This move was made to ensure that the bank system’s liquidity is “reasonably adequate .”

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The PBOC offers MLF loans to some financial institutions, with current loans totaling 400 billion yuan (approximately $59 billion). It also reduced its primary rate, at which banks can access short-term liquidity, from 2.1 to 2 percent.

A recent Reuters survey of market watchers predicted that the PBOC would keep the MLF rates unchanged. The PBOC has reduced these rates for the first time in January 2022. The central bank previously indicated that they were hesitant to reduce rates because of multiple economic problems, including rising inflation and debt pressures, as well as the pressure on the yuan.

Experts were surprised by the decision of the central bank. We are surprised by the rate reduction. It is a reaction to Friday’s weak credit data. The government remains cautious about growth and will not let go,” Xing Zhaopeng, senior China strategist at ANZ, said to Reuters.=

The PBOC decision was made after a series of disappointing economic data. For example, retail sales grew by only 2.7 percent in July, as compared to a year earlier. This compares to a June increase of 3.1 percent. The industrial output increased by 3.8%, compared to 3.9 percent in June.

New credit experienced the slowest growth since 2017. China’s economic slowdown kicked off in March after authorities imposed strict COVID-19 lockdowns in dozens of cities.

COVID-19 Policies, Property Market Woes

According to Nomura Holdings, China’s growth in the second half of 2022 will be negatively affected by its strict COVID-19 policies, a potential slowdown in exports, and a downward spiral in the property market.

“Beijing’s policy support could be too little, too late, and too inefficient,” Nomura said about the rate cut in a note, according to Bloomberg. We believe markets are overly optimistic about growth for the second half of 2018, and expect another round of reductions to growth forecasts in the coming weeks .”

The property market in China has also been struggling for quite some time. As the sector accounts for around 30 percent of gross domestic product (GDP), it is putting significant pressure on the economy. Anger buyers threatened to cease paying their mortgages for unfinished properties, triggering the crisis in property markets.

According to Goldman Sachs the current situation makes it more difficult for people to make a move to a new house. JP Morgan is expecting the first-half earnings of Chinese developers to be lower by 30 percent year over year.

In the seven first months of 2022, property investments by Chinese developers, 6.4 percent fell. In July, new home prices fell for the eleventh straight month in 70 major cities.