China surprise cuts interest rates to combat slowing economy

The People's Bank of China (BPC) has unexpectedly cut two of its main references for loans to banks on Monday in an attempt to deal with the slowdown in economic growth and the difficulties in the real estate sector.

It is the first cut in the price of money since January and comes at a time when most of the world's central banks are rowing in the opposite direction: raising rates to try to contain inflation.

The issuing institute has chosen to lower the rate applied to reverse repurchase operations maturing in seven days by ten basis points —up to 2%, from 2.1%.

The one that governs medium-term loans maturing in one year, for its part, has gone from 2.85% to 2.75%.

In both cases, these are record lows.

The Chinese central bank has also announced this Monday an injection of 400,000 million yuan (57,791 million euros) through the medium-term loan facility, with 2.75% interest.

The objective: “Maintain reasonable and sufficient liquidity in the banking system”.

It has also carried out a reverse refinancing operation for another 2,000 million yuan (289 million euros).

The operations carried out, adds the monetary authority, "fully meet the needs of the financial institutions" of the Asian giant.

Capital Economics Senior China Economist Julian Evans-Pritchard has called the rate cuts announced by the People's Bank of China a "surprise," though he believes they "will make little difference to liquidity conditions."

In recent months, the PBC had been reluctant to lower the price of money despite the economic setback caused by the latest lockdowns.

The central bank's refusal was due to fears of debt risks, greater downward pressure on the yuan and the increase in the consumer price index, emphasizes Evans-Pritchard, who believes that this script twist is due to to the "weak inertia" of the economic indicators for July and the slowdown in credit growth.

The Capital Economics analyst clarifies, yes, that the cuts announced today will not imply a notable change in liquidity conditions, given that interbank rates are already below those of the BPC, so that entities do not present a great demand funding from the central bank.

And he believes that the cut may not be enough to revive the rebound in credit: the weakness, he stresses, is "partially structural", derived from the "loss of confidence in the real estate market and the uncertainty caused by the constant disruptions caused by the strategy of covid zero from China”.