People’s Bank of China
China unexpectedly cut key interest rates and announced corporate tax cuts on Tuesday as the world’s second-largest economy’s post-coronavirus recovery slowed and lost momentum.
While China’s central bank cut short-term lending rates for the first time in 10 months in an attempt to restore market confidence and support the world’s second-largest economy’s faltering recovery from the coronavirus pandemic, the cut signaled policymakers’ growing focus on post-restriction China. strength of recovery. The move also reflects “the potential for emergency stimulus measures to support growth in the period ahead”.
Following the rate cut, the government released credit growth figures for May that analysts said fell well short of expectations as weakness in the housing sector weighed on consumer sentiment, according to a report published in the Financial Times. show:
- China’s economy rebounded in the first quarter after strict coronavirus controls were lifted, but has faltered in recent weeks as export growth slowed and the property sector struggled to emerge from a prolonged recession.
- The government attempted to rectify the situation by cutting the 7-day reverse repurchase rate by 10 basis points from 2.00% to 1.90% and injecting 2 billion yuan ($279.97 million) through a short-term bond facility to “reasonably maintain adequate liquidity in the banking system.” “.
- It was the first time in nine months that the central bank cut the interest rate, which sets the cost of borrowing for seven days.
- Lower interest rates have lowered the cost of short-term loans and enhanced liquidity in China’s financial system.
China continues to run counter to global central banks as it pursues easy monetary policy to support growth, while its major peers raise interest rates to curb rising consumer prices.
On Tuesday, the government announced 22 cost-cutting measures for businesses this year, including tax breaks and direct loans to certain industries.
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stimulate export growth
In an exclusive statement to the Sky News Arab Economy website, author and economic analyst Michael Parkin, professor of economics at Western University, pointed out the implications of this sudden reduction and whether it portends additional movements to come.
The PBOC’s 10bps cut to 1.9% in the 7-day reverse repurchase rate was a (small) cut but provided a clue about the PBOC’s future direction, he said.
He added, “This depreciation shows that the PBOC is somewhat satisfied with the current inflation rate and future expectations, and hopes to lower the yuan exchange rate to stimulate export growth and support increased production.”
In this context, the above-mentioned “Financial Times” report quoted analysts as saying that the reduction of the reverse repurchase rate may herald the reduction of other interest rates of the central bank, including the medium-term lending facility rate and the basic lending rate.
- “We expect further policy easing to be announced,” Goldman Sachs said in a note.
- Julian Evans-Pritchard, head of China economics at Capital Economics, said the government would need to cut rates more aggressively if it wanted to stimulate a recovery in loan demand.
More substantive measures could include extra help for developers to complete unfinished property projects, analysts said, especially since many developers lack funds to complete projects after a prolonged slump.
real estate industry
The Chinese economy outperformed expectations in the first three months of 2023, with GDP growing by 4.5%; Relatively different signs of a trend emerged last week, casting doubt on economic growth. Possibility of continued “rapid recovery”.
- Prominent among these was weakness in the real estate sector, with sales falling to 63% in April from 2019 levels, down from 95% in March, according to research firm Gavekal.
- The housing crisis spilled over into industrial production, which fell in April compared with seasonally adjusted data for 2019, as demand for cement, glass and other commodities fell. Household consumption, one of the main drivers of the recovery, also lost steam.
- Property sales, industrial productivity and credit growth missed previous expectations in April and early May, which could lead to fewer opportunities for targeted growth.
Against this backdrop, Tariq Al-Rifai, CEO of Quorum Center for Strategic Studies, said in an exclusive statement to Sky News Arab Economics that the “sudden” rate cut was an attempt by the Chinese government to support the economy, especially the real estate sector. . Based on the fact that the Chinese economy is largely related to this industry, more than 20%.
He added: “Weak growth in the real estate sector in recent years has prompted China to try to provide support for the sector, three years ago we saw more than one real estate company collapse due to strong speculation in the sector, and then the aftermath of raising interest rates after that, Until the Bank of China is now starting to cut back in an effort to restore support for the sector.
The CEO of the “Quorum” Strategic Research Center emphasized that the Chinese economy faces two main problems:
- The first problem: the high debt ratio in the private sector and the government sector is at a high level, and this affects the entire economy.
- The second question is that the Chinese economy has been slowing down for many years, and there is widespread concern within the government, trying to resist this trend and restore growth momentum.
Revitalize the economy
Abu Bakrdib, a researcher in international relations and political economy, pointed out that the sudden decision of the People’s Bank of China to cut short-term interest rates for the first time since August 2022 is mainly due to the following reasons; the most important of which is the bank’s realization that interest rate cuts are necessary to stimulate the Chinese economy Arterial activity after a wave of stagnation and weakness, and expected further rate cuts following the decision.
He explained that one of the reasons for the decision was also that those in charge of monetary policy in China wanted to promote medium-term lending, especially since this rate cut was the first in ten months and after the economic recovery lost more momentum Weak manufacturing and investment.
After announcing a seven-day reverse repurchase operation worth 2 billion yuan ($280 million) at an interest rate of 1.9 percent, the bank injected liquidity into the financial system through open market operations to keep the country Cash liquidity in the banking system is reasonably sufficient.
The reverse repurchase operation is referred to as “reverse repurchase”, which refers to the operation in which the central bank purchases securities from commercial banks through bidding and agrees to sell them back in the future.
Al-Deeb confirmed that the rate cut, aimed at supporting the faltering post-corona pandemic recovery of the world’s second-largest economy and largest oil importer, is likely to increase demand for oil, highlighting that last May, economic activity data showed a recovery Weakness The need for monetary easing has increased in China’s economy after industrial output, retail sales and fixed-asset investment grew much weaker than expected in April, while inflation fell to near-zero levels.
Given these signs, the Bank of China is believed to accelerate monetary easing through further rate cuts until early 2024.
Barclays expects China to cut interest rates by 10 basis points per quarter from the third quarter of 2023 to the first quarter of 2024.