China Steps Up Efforts to Encourage Growth

China Steps Up Efforts to Encourage Growth

China's central bank has cut its main benchmark lending rates for the first time in 10 months in its latest effort to encourage growth as the world’s second-largest economy slows down.

The rate cuts come as Wall Street banks, including Goldman Sachs, curtail their forecasts for China’s economy. Goldman said that the recovery spurred by the country’s post-Covid reopening appeared to have “fizzled out” in the second quarter as it slashed its growth projection for this year from 6%. to 5.4%.

On June 20, The People’s Bank of China decreased its one-year loan prime rate (LPR) by 10 basis points from 3.65% to 3.55% and lowered the five-year rate by the same margin to 4.2%. These cuts come on the heels of a reduction of the bank’s key policy rate - the medium-term lending rate, seven-day reverse repo rate, and dollar deposit rate made a week earlier The yuan has lost more than 6% against the dollar since highs hit in January, when China reopened its borders. This is the first time the PBOC has cut both LPR rates since August 2022, when renewed Covid lockdowns and a deepening property downturn were battering the economy.

The Chinese producer price index fell 4.6% in May, the biggest decline in seven years, according to government statistics. Exports fell 7.5% in May from a year earlier, the most significant decline since January, and imports contracted further.

China's annual inflation rate increased to 0.2% in May 2023 from April's 26-month low of 0.1% but below market estimates of 0.3%, according to a monthly report by the National Bureau of Statistics. The low inflation levels are in sharp contrast to rising prices in other major economies around the world, suggesting weakness in China’s domestic demand.

Analysts say the central bank’s efforts before and on June 20, did not go far enough. “The 10 bps rate cut[s] are unlikely to stimulate business confidence and housing demand,” said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank to Reuters. “We reckon that a bold stimulus package covering fiscal policy and supporting measures in property markets are needed to revive market confidence on China’s recovery,” he added.

Economists at Citi wrote in a report on the LPR cuts that “decisive support is necessary to avoid a confidence trap and keep growth on track”, adding that they “continue to see a measured stimulus package with a focus on property as both plausible and possible.

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