China's Central Bank Implements Significant Interest Rate Cut to Combat Economic Challenges

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Aug 15, 2022
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China's central bank unexpectedly reduced a key interest rate by the most since 2020 in a bid to support the economy, which is facing heightened risks due to a worsening property market and weak consumer spending. The People's Bank of China lowered the rate on its one-year loans by 15 basis points to 2.5%, the second cut since June. This surprised analysts as most had predicted no change. A short-term policy rate was also lowered by 10 basis points.
The move was prompted by disappointing economic activity data for July, which revealed a decline in consumer spending, industrial output, and investment, along with rising unemployment. The National Bureau of Statistics (NBS) highlighted the need for stronger macroeconomic policy adjustments and increased domestic demand to bolster the economy.
The rate cut led to gains in government bonds but put downward pressure on the exchange rate. The yield on China's 10-year bonds dropped to its lowest level since 2020, while the yuan weakened against the dollar.
Key takeaways from the data:
- Industrial production growth in July was 3.7%, below the expected 4.3%.
- Retail sales growth slowed to 2.5%, well below the forecasted 4%.
- Fixed-assets investment growth weakened to 3.4% in the first seven months of the year, lower than the projected 3.7%.
- Property investment contracted by 8.5% during the period, and the urban jobless rate increased to 5.3%.
This rate cut marked the first policy action under new Governor Pan Gongsheng, reflecting concerns about the deteriorating economic outlook, particularly in the real estate sector. China's economic challenges are causing global concerns, with US Treasury Secretary Janet Yellen and President Joe Biden expressing worry about its potential impact on the global economy.
Amid calls for monetary and fiscal stimulus, Beijing is under pressure to support the economy following a pro-growth stance by the Communist Party's Politburo. Economists suggest further measures, including potential reserve requirement ratio cuts for banks.
The easing action by the Chinese central bank is also placing downward pressure on the yuan due to a weakening growth outlook. The growing yield gap between US and Chinese government bonds is fueling capital outflows.
Weakness in consumer spending on goods, influenced by low prices, was noted in July. Industrial production was likely affected by severe flooding. Fixed investment by private businesses contracted, indicating low confidence.​