The Chinese central bank has made significant changes to its interest rates, the first since last August. These changes are influenced by a slowdown in financial growth in the second quarter and likely by discussions at the Communist Party plenum. The bank demonstrates adaptability in managing economic fluctuations as a part of a broader plan to stabilize China’s financial market.
The amendments made to the central bank’s key policy rate, its market operations rates, and lending rates come as China grapples with potential deflation, a troubled property market, mounting debt, and falling confidence among consumers and businesses, compounded by global concern about China’s strong export sector. These adjustments are central to China’s efforts to address these challenges.
Chief economist at Macquarie in China, Larry Hu, underscored the surprising nature of the bank’s decisions as an answer to stagnant second quarter growth and the ambition to reach growth targets set at the third plenum. He stated, “It is a clear indication that the People’s Bank of China (PBOC) is worried about the slowdown in the economic momentum”. The PBOC maintains its commitment to a prudent monetary policy, adopting timely and appropriate measures to safeguard the financial stability of the world’s second-largest economy.
The currency and bond market in China underwent significant changes following these rate cuts, with the currency initially falling to a two-week low, and yield declining.
Adjusting central bank rates amid China’s economic slackening
However, the currency managed to recover somewhat, and the yields eventually stabilized. This recovery was visibly reflected in the yuan slightly strengthening by the end of trading.
Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, noted the Chinese central bank’s decision to cut rates ahead of the Federal Reserve. Zhiwei interprets this as the government acknowledging the economic pressures on China, and anticipates more rate cuts following the rate reductions initiated by the Federal Reserve.
The goal of the rate cuts, as stated by the Chinese central bank, is to heighten counter-cyclical adjustments and provide added support to the actual economy. The bank also underscored the necessity for easier and cheaper credit access for smaller businesses, leading to a more robust financial structure supporting economic growth.
Furthermore, the bank aims for greater monetary policy efficiency by using the repo rate as a reference rate. This move toward the repo rate is expected to finesse the cost of funding and yield curve, spurring more spending and investments, particularly in the entrepreneurial sector. This gradual implementation of strategies is anticipated to encourage a more stable cash flow to the economy.
