China cuts 1-year benchmark rate, moving to boost economy as world markets languish

China ratcheted up its effort to reinvigorate its economy yesterday by cutting a key policy rate and interest paid on bank deposits.

The move coincided with a downturn in world stocks, extending losses in Chinese markets that have declined this year while share prices soared in many other countries.

By midday, Hong Kong’s Hang Seng was down 1.4% and the Shanghai Composite index lost 0.4%.

The People’s Bank of China said it cut the lending rate for one-year medium term policy loans by 20 basis points to 2.3%. That is the biggest rate cut since China’s economy was slammed by the COVID-19 pandemic in 2020.

The rate on 7-day loans was reduced to 1.7%.

Major state-run banks cut deposit rates to relieve pressure on their finances, reducing the rate paid on one-year fixed deposits by 10 basis points to 1.35%, the official Xinhua News Agency reported, citing official rates released yesterday by the country’s “Big Four” banks: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank.

The banks cut deposit rates three times last year and this was the first reduction for 2024, it said.

But while lower deposit rates may be good for the bank’s balance sheets they won’t encourage more consumer spending — the one thing most economists agree is needed to help revive growth that has been falling for years and was hit especially hard by a downturn in China’s property sector.

“Banks are already passing on lower deposit rates to savers: which will do nothing to encourage spending in the current environment, and people will instead save even more to generate the same return they were earning before,” RaboResearch said in a commentary.

Growth in the world’s second-largest economy slowed to 4.7% in the last quarter, down from 5.3% in January-March.

Earlier this week, the central bank cut several of its other lending rates, sticking to a cautious approach to stimulating the economy.

The flurry of rate cuts this week followed a major policy-setting meeting of the ruling Communist Party last week that laid out ambitious plans for reforms in many areas of the economy but did not spell out any specific plans for stimulus driven by government spending.

Instead, the party has opted for fine-tuning.

The planning meeting focused on mapping out long-term goals but also emphasized short-term targets, Nicholas Yeo of abrdn, formerly Standard Life Aberdeen plc, said in a report.

“This was unusual, but positive, as this could be an indication of the authorities’ growing awareness of the need to address the country’s lagging economic growth,” he said.

The rate cut also helps relieve pressure in the bond market since the central bank also has cut collateral requirements for its medium-term lending facility, enabling lenders to sell bonds normally used as collateral. 

ELAINE KURTENBACH, BANGKOK, MDT/AP