BEIJING — China’s central bank on Monday cut one of its key interest rates for the first time in three months, in a move that analysts said was aimed at supporting the country’s faltering economic recovery amid a deepening property slump and weak consumer demand.
The People’s Bank of China (PBOC) reduced its one-year loan prime rate, which is mainly used as a benchmark for corporate lending, by 0.1 percentage point to 3.45 percent. However, it left its five-year loan prime rate, which is mainly used to price mortgages, unchanged at 4.2 percent.
The decision surprised some economists, who had expected a bigger and more coordinated cut in both rates, following a similar reduction in the PBOC’s medium-term lending facility rate last week. The medium-term lending facility rate is a tool that the central bank uses to inject liquidity into the banking system and influence market interest rates.
The PBOC’s latest move came as China’s economy showed signs of losing momentum in the second half of the year, after a strong rebound from the coronavirus pandemic in 2020. Data released last week showed that China’s industrial output, retail sales and fixed-asset investment all grew slower than expected in July, while the urban unemployment rate edged up to 5.1 percent.
One of the main drags on China’s growth has been the turmoil in its property sector, which accounts for about a quarter of the country’s gross domestic product and has ripple effects on other industries. Several major developers, including Evergrande Group and Country Garden Holdings, have faced liquidity problems and debt defaults, triggering fears of a broader financial contagion and social unrest.
Evergrande, once China’s largest property developer by sales, filed for bankruptcy protection in the United States on Friday, as it sought to restructure its $300 billion debt load. The company has been struggling to pay its suppliers, contractors and investors, while also facing protests from homebuyers who have paid deposits for unfinished apartments.
The PBOC’s interest rate cut on Monday was seen as a signal that the authorities were concerned about the impact of the property crisis on the economy and were willing to ease monetary policy to prevent a hard landing. However, some analysts said that the modest and selective nature of the cut also reflected the central bank’s caution about adding too much stimulus and fueling inflationary pressures or asset bubbles.
“The PBOC is trying to strike a balance between supporting growth and maintaining financial stability,” said Iris Pang, chief economist for Greater China at ING Bank. “It wants to lower borrowing costs for businesses, especially small and medium-sized enterprises, but it also wants to avoid stimulating the property market too much.”
Ms. Pang said that she expected the PBOC to cut both the one-year and five-year loan prime rates by another 0.1 percentage point in the fourth quarter, as well as lower banks’ reserve requirement ratio — the amount of cash that banks must hold as reserves — by 0.5 percentage point.
Other economists said that the PBOC’s interest rate cuts were not enough to revive China’s economic growth and that more fiscal and regulatory measures were needed to boost consumer confidence and spending.
“The PBOC’s approach to monetary policy is of limited use in the current environment and won’t be enough, on its own at least, to put a floor beneath growth,” Julian Evans-Pritchard and Zichun Huang, economists at Capital Economics, wrote in a note. “Reviving demand would take much larger rate cuts, or regulatory measures to effectively restore confidence in the housing market.”