The Chinese central bank lowered interest rates on loans from the state-controlled banking system on Tuesday. This is the clearest sign yet of growing concerns from the Chinese government and corporate sector that the country’s economy is faltering.
The rate cut was small — a tenth of a percentage point for the nationwide benchmark lending rates on one-year and five-year loans. However, with almost all of the country’s corporate lending and mortgages tied to the two interest rates, the cuts could have some impact on the overall pace of economic growth.
The move by the central bank, the People’s Bank of China, puts China at odds with Western politics. The Federal Reserve fought inflation by raising interest rates for over a year before taking a pause this month. The European Central Bank has also raised interest rates in response to inflation.
But China has the opposite problem: Private sector spending and investment are so weak that companies are competing to cut prices to retain customers. Consumer and producer prices fell in the four months to May.
Investors were disappointed by the central bank’s interest rate cuts and stock prices in Hong Kong and Shanghai fell on Tuesday. The rate cut was a little smaller than many investors had hoped, a reminder that the Chinese economy is struggling.
China’s currency, the renminbi, also weakened against the dollar. In recent months, lower interest rates in China than in the United States have created an incentive for Chinese businesses and households to transfer their money out of the country, bypassing China’s strict restrictions on large-scale money transfers abroad.
Rate cuts are a slow-acting drug for the Chinese economy, said Han Shen Lin, a former deputy general manager for China at Wells Fargo Bank who now teaches finance at New York University in Shanghai. As a rule, companies negotiate their credit limit with their banks once a year and then take out loans with a term of a few weeks to several months. Only when new loans are taken out or existing loans are extended does the lower interest rate apply.
Tuesday’s central bank cut “will seep through the system, but only gradually,” Mr Lin said.
Households will have to wait even longer to benefit. Mortgage interest rates are almost always adjustable in China. But the adjustment often occurs in January, China’s central bank said on Tuesday in a statement accompanying the rate cut announcement.
So while people buying a home in the next few months could benefit from the new cuts, many homeowners will have to wait longer.
Tuesday’s move was China’s first cut in lending rates since August, when the country’s economy was still struggling after a two-month Covid lockdown in Shanghai. The latest cuts signal that Beijing is looking to stabilize manufacturing while exports are falling, construction is stagnant and consumer confidence is weak. The government’s abrupt lifting of Covid controls late last year had raised hopes that China’s economy was getting back on its feet.
The modest scale of the rate cuts suggests concern, but not panic, among China’s policymakers. In contrast, as the global financial crisis gathered momentum in late 2008, the People’s Bank of China cut interest rates on loans and deposits by 1.08 percentage points in a single day. And during the Asian financial crisis in the late 1990s, China cut lending rates by 1.44 percentage points in one day.
Tuesday’s cut raised the one-year interest rate from 3.65 percent to 3.55 percent. Businesses typically pay the reference interest rate plus one or more percentage points, with smaller businesses and private sector companies paying more than large corporations and state-owned companies.
The five-year interest rate, which serves as a benchmark for setting mortgage rates, was cut from 4.3 percent to 4.2 percent. Homebuyers and homeowners often pay another percentage point more.