China yesterday cut interest rates for the third time in six months in a bid to lower companies’ borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.
The People’s Bank of China (PBOC) said on its Web site it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 percent beginning today. It cut the benchmark deposit rate by the same amount to 2.25 percent.
“China’s economy is still facing relatively big downward pressure,” the Chinese central bank said in a separate statement.
“At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average,” it said.
Yesterday’s rate cut came just days after last month’s weaker-than-expected trade and inflation data, highlighting that the world’s second-largest economy is under persistent pressure from softness in both external and domestic demand.
Economists had said it was not a matter of if, but when China eased policy again after economic growth in the first quarter cooled to 7 percent, a level that has not seen since the depths of the 2008-2009 global financial crisis.
Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.
With China set to publish more key economic data on Wednesday, including industrial output and investment, the timing of the rate cut could add to worries that figures may disappoint across the board again, as they did in March.
However, for now, some were confident that policymakers can arrest the slide.
“Intensified policy loosening will help effectively halt the economic slowdown,” said Xu Hongcai (徐洪才), a senior economist at the China Center for International Economic Exchanges, a well-connected Beijing think tank.
In a sign that authorities want to press on with reforms, the central bank also took a big step in freeing up the interest rate market by lifting the ceiling for deposit rates to 1.5 times of the benchmark level.
That was the biggest increase in the ceiling since reforms started in 2012.
A cooling property market and slackening growth in manufacturing and investment have weighed on the Chinese economy. Annual growth is widely forecast to sag to 7 percent this year, down from 7.4 percent last year.
In a bid to energize activity, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.
This is partly because despite the steady drumroll of policy easing, there are indications that it has not benefited the real economy. Some data suggest banks are not passing on lower interest rates to borrowers, and credit is still not flowing into sectors that are in need of funds.
“The effectiveness of the rate cut won’t be very big,” said Li Qilin, an economist at Minsheng Securities (民生証券). “The PBOC has already cut benchmark interest rate by a total of 75 basis points, but borrowing costs have only fallen marginally.”
Chinese government economists said earlier this month that authorities might increase state spending in coming months to shore up growth, in the hope that fiscal policy would work where monetary policy has not.
However, Li Huiyong (李慧勇), an economist at Shenwan Hongyuan Securities(申萬宏源證券) in Shanghai, cautioned against thinking that lower borrowing costs would not trickle down to businesses and consumers at some point.
“Don’t underestimate the cumulative effect of the cuts in interest rates and RRR,” Li said. “This won’t be the last cut.
“The rate could be lowered to 2 percent at least, and we expect the economy to gradually stabilize in the coming two quarters,” Li said.
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