China cuts key rates to support fragile economy
SHANGHAI—China surprised markets by lowering a key short-term policy rate and its benchmark lending rates on Monday, in efforts to boost growth in the world’s second-largest economy.
The cuts come after China reported weaker-than-expected second-quarter economic data last week and its top leaders met for a plenum that occurs roughly every five years.
The country is verging on deflation and faces a prolonged property crisis, surging debt and weak consumer and business sentiment. Trade tensions are also flaring, as global leaders grow increasingly wary of China’s export dominance.
“The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for ‘achieving this year’s growth target’ by the third plenum,” said Larry Hu, chief China economist at Macquarie.
The People’s Bank of China (PBOC) said on Monday it would cut the seven-day reverse repo rate to 1.7 percent from 1.8 percent, and would also improve the mechanism of open market operations.
Minutes later, China cut benchmark lending rates by the same margin at the monthly fixing. The one-year loan prime rate (LPR) was lowered to 3.35 percent from 3.45 percent previously, while the five-year LPR was reduced to 3.85 percent from 3.95 percent.
Under pressure
Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said that growing expectations for the Federal Reserve to start cutting interest rates also gave the PBOC room to ease its policy, given the pressure the yuan has been under because of a wide yield gap with the dollar.
Following the rate cuts, China’s yuan dropped to a near two-week low of 7.2750 per dollar, before paring some losses.
Chinese sovereign bond yields fell across the curve, with 10-year and 30-year down as much as 3 basis points, before stabilizing at 2.24 percent and 2.45 percent, respectively.
China’s 30-year treasury futures for Sept 2024 delivery rose roughly 0.3 percent in early trade on Monday.
“The fact that PBOC didn’t wait for the Fed to cut first indicates that the government recognizes the downward pressure on China’s economy,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
He expects more rate reductions in China after the Fed begins a rate-cutting cycle.
