On Monday, August 22, China’s central bank lowered interest rates to save the troubled economy as repeated lockdowns keep hitting multiple sectors across the country.
The People’s Bank of China (PBOC) cut the one-year loan prime rate (LPR) from 3.7% to 3.65%. The rate is the reference rate for new and outstanding loans.
It also cut the five-year LPR, a reference rate for mortgages, from 4.45% to 4.3%.
Beijing has stuck to its strict Zero-Covid policy to contain the virus from spreading nationwide at the expense of its economy.
Last week, in a surprise move, PBOC pumped $59 billion into the financial system and lowered the two key rates. First, it cut one-year medium-term lending facility (MLF) loans by 10 basis points, from 2.85% to 2.75%. Second, PBOC lowered short-term liquidity to banks from 2.1% to 2%.
The MLF rate cut often passes on to the prime loan rate. In China, commercial banks use the five-year prime rate as a key reference for their mortgage rate.
Another key sector that affects China’s economy, real estate, is in crisis, with property sales plunging and home prices repeatedly declining month after month with no sign of recovery. Real estate accounts for a quarter of China’s gross domestic product.
Sheana Yue, a China economist at Capital Economics, told the South China Morning Post about the effect of the rate cut on the real estate sector, “Homebuyers with existing mortgages will have to wait until the start of next year for the change to affect them. Moreover, the current weakness in loan demand is partly structural, reflecting a loss of confidence in the housing market and the uncertainty caused by recurrent disruptions from China’s Zero-Covid strategy. These are drags that can’t be easily solved by monetary policy.”
While Beijing set China’s target growth of 5.5% for 2022, many investment banks and financial institutions cut their forecast for its growth.
Standard Chartered cut the second world economy’s GDP growth for the full year to an estimated 3.3%. Goldman Sachs lowered its prediction from 3.3% to 3%. Nomura downgraded its forecast to as low as 2.8% from 3.3%.
In April, the International Monetary Fund lowered China’s growth to 3.3%, down from 4.4%.