China Central Bank Cuts Key Interest Rate on Bank Lending



The action by the central bank, the latest in a series of steps to try to spur lending, was more modest than expected.

A person on a scooter wearing a bright helmet rides past a Country Garden construction project in China.
A construction project by Country Garden, which has become the country’s largest developer to run into financial difficulties. Credit…Qilai Shen for The New York Times

Stocks in China tumbled and the currency weakened on Monday after the country’s central bank announced a smaller-than-expected cut in a key interest rate.

Many investors and economists had been expecting Beijing to act more decisively on interest rates as China faces falling apartment prices, weak consumer spending and broad debt troubles.

The central bank, the People’s Bank of China, shaved only a tenth of a percentage point off the benchmark one-year interest rate used for most corporate loans, with no change at all in the five-year rate used for pricing mortgages. The slight reduction for one-year loans marked the second time in two months that the government has pushed down commercial banks’ lending rates.

The modest scale of the cut on Monday was the latest sign that the government’s usual tools for addressing an economic slowdown may have lost some of their effectiveness, economists said.

“This will provide only modest support to credit growth and wider economic activity,” Capital Economics, a London research firm, said in a note.

Global investment banks have rushed to reduce their forecasts of the Chinese economy’s growth, for which Beijing has a target this year of “around 5 percent.” UBS announced on Monday, shortly before the interest rate cut, that it was lowering its expectations for growth to 4.8 percent this year and 4.2 percent next year. Nomura of Japan is even gloomier, predicting last Friday that growth would be 4.6 percent this year while keeping its forecast for next year at 3.9 percent.

The CSI 300 index of large Chinese companies traded in Shanghai and Shenzhen fell 1.4 percent on Monday, while the Hang Seng Index in Hong Kong, which also includes many large Chinese companies, tumbled 1.8 percent, to its lowest level since November. The Hang Seng has fallen for seven consecutive sessions and is down more than 12 percent in August.

The renminbi closed weaker than 7.3 to the dollar on Monday in Shanghai trading, a level that the Chinese government tried to maintain last November, when the currency was at its weakest since 2007. It weakened even more on Monday in Hong Kong, where trading is less tightly controlled. It took more than 7.335 renminbi to buy $1 by midafternoon there.

The authorities in Beijing use the country’s cash reserves and state-controlled banks to buy and sell currencies so as to limit moves in the renminbi’s value against the dollar.

The renminbi suddenly rebounded a bit in the final minutes of Shanghai and Hong Kong trading. The Chinese government has a long history of intervening in currency markets at the end of trading sessions to prevent closing prices from showing sharp changes.

As a result, many investors view intraday movements of the renminbi, which is also known as the yuan, as a truer measure of its value.

“The intraday shows you the direction the market wants to take the yuan and the close is more likely to show you the government’s action,” said Diana Choyleva, the chief economist at Enodo Economics in London.

Monday’s rate cut was intended to make it a little cheaper for companies and households to borrow money and to make payments on existing loans. But the full effect of the reduction may be delayed because the interest rates on most loans are reset annually, often at the start of each year.

The central bank, in consultation with state-controlled commercial banks, reduced the one-year benchmark interest rate for corporate loans to 3.45 percent, from 3.55 percent. The benchmark interest rate for five-year loans stayed at 4.2 percent.

A survey of 35 economists by Reuters last week showed that all of them expected the central bank to reduce interest rates for five-year loans as well as one-year loans.

Last week, the central bank lowered borrowing costs for commercial banks by 0.15 percentage points. By making a more modest cut in the one-year lending rate and leaving the five-year rate untouched, policymakers were, in effect, widening the profit margins for banks.

China’s commercial banks have lent massively in recent years to real estate developers and home buyers — the same groups that have been hit hardest by China’s housing crash.

More than 50 real estate developers have already defaulted or stopped payments on overseas bonds. Country Garden has become the country’s largest developer to run into financial difficulties, with some $200 billion in unpaid bills.

The opaque accounting of China’s state-controlled financial system has made it difficult for outsiders to discern the scale of the banks’ real estate-related losses. Wider profit margins on loans could help banks accumulate more reserves to offset these losses.

Keith Bradsher is the Beijing bureau chief for The Times. He previously served as bureau chief in Shanghai, Hong Kong and Detroit and as a Washington correspondent. He has lived and reported in mainland China through the pandemic. More about Keith Bradsher



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