China has taken steps to stimulate credit demand by reducing its one-year benchmark lending rate, lowering it by 10 basis points to 3.45% from 3.55%. This move is part of broader efforts to provide policy stimulus to counteract a slowing economy due to factors like a weakening property market, reduced consumer spending, and declining credit growth.
However, the unexpected aspect of this move was that China decided to keep its five-year lending rate unchanged at 4.20%. This surprised markets, as most participants in a Reuters poll predicted cuts to both rates.
China’s economic recovery has faced challenges, and authorities are keen on stimulating credit demand. Yet, the country’s monetary easing is constrained by concerns about the weakening yuan. Further cuts to interest rates could lead to wider yield differentials with other major economies, potentially causing the yuan to depreciate further and prompting capital outflows.
The yuan has already depreciated by almost 6% against the dollar this year, making it one of the worst-performing Asian currencies.
While the reduction in the one-year lending rate is aimed at boosting the economy, the decision to keep the five-year rate unchanged suggests concerns about the effectiveness of policy guidance pass-through and the potential negative impact on growth and the yuan’s exchange rate.
China’s central bank, the People’s Bank of China (PBOC), has also expressed its commitment to maintaining ample liquidity and implementing precise and forceful policies to support economic recovery.
The PBOC indicated it will optimize credit policies for the property sector while coordinating financial support to address local government debt issues. The property sector and default risks among developers have prompted expectations of deeper cuts to lending benchmarks.