The People’s Bank of China (PBOC) cut two key interest rates on Tuesday, following similar measures taken last week, in a fresh attempt to counter the slowdown in the world’s second-largest economy. According to a statement issued by the central bank, the one-year market prime rate (LPR), which serves as a benchmark for business loans, was cut from 3.65% to 3.55%. Likewise, the five-year LPR, used for mortgages, was reduced to 4.2% from 4.3%. These two rates are now at their lowest level in history, having last been reduced in August 2022.
The objective of this decision, which was expected by the markets, is to encourage commercial banks to grant more loans at more favorable rates. This measure seeks to support economic activity in the context of a global economic slowdown, where the world’s major economies are raising interest rates to control inflation.
The long-awaited economic recovery in China after the lifting of restrictions due to the COVID-19 pandemic at the end of 2022 seems to be petering out in recent weeks and is only materializing in some sectors. To revitalize the economy, the central bank had already cut the medium-term lending rate to financial institutions last week, which would inject 237 billion yuan (€30.6 billion) into the economy.
The recent announcements show growing concern among political leaders about the economy, according to economists Julian Evans-Pritchard and Zichun Huang of Capital Economics. While they note that a sharp acceleration in the number of loans is unlikely, they indicate that the recovery will continue to rely primarily on the service sector.
The Chinese economy faces challenges due to over-indebtedness in the real estate sector, subdued consumption in a context of labor uncertainty, and the global economic slowdown affecting demand for Chinese products. In addition, disappointing economic indicators have been revealed in recent weeks, such as a high youth unemployment rate.
The Chinese government is targeting growth of around 5% this year, which would be one of the lowest rates in decades for the Asian giant. According to the World Bank, the recovery in China remains fragile and dependent on government support. Although some economists advocate a stimulus package to boost growth, so far the authorities seem to favor specific measures rather than a broad approach. These measures include building more electric vehicle charging stations across the country, including in rural areas, with the aim of having wide coverage by 2030 and supporting the development of new energy vehicles. The automotive sector is important to the Chinese economy and represents a significant source of employment.