China Cuts Key Interest Rates as Economic Growth Wanes

A general view of Two International Finance Centre (IFC), HSBC headquarters, and the Bank of China in Hong Kong on July 13, 2021. Tyrone Siu/Reuters

China has unexpectedly cut rates on policy loans for the first time since April 2020 in the face of lowered economic performance owing to critical power shortages, defaults in the property market, a crackdown on major companies, and repeated COVID-19 outbreaks.

The interest rate on 700 billion yuan ($110.2 billion), one-year, medium-term, lending facility (MLF) loans was reduced by 10 basis points to 2.85 percent by the People’s Bank of China (PBOC) on Monday. By the same margin, the rate on seven-day reverse repurchase agreements, or repos, was reduced to 2.1 percent. Another 100 billion yuan ($15.7 billion) worth of reverse repos were offered into the system while 500 billion yuan ($78 billion) worth of MLF loans were coming due Monday.

Analysts predict more monetary easing will occur to balance an economic slowdown. PBOC had pledged in December to play a more active role in supporting the Chinese economy. Seventy percent of 48 traders who were polled by Reuters last week said they hadn’t anticipated the change in rates.

“The PBOC’s decision to ease early in January suggested that economic downward pressure intensified at end-2021 and room for improvements in the first quarter of this year is not huge,” Ken Cheung, chief Asian FX strategist at Mizuho Bank, said to the media outlet.

China’s gross domestic product (GDP) grew by 4 percent for the last three months of 2021, based on data from the National Bureau of Statistics. While analysts predicted 3.3 percent, the number was lower than the previous quarter. China’s growth last year amounted to 8.1 percent, higher than the leadership’s target of over 6 percent.

The $300 billion worth of defaults of property giant Evergrande rocked the core industry that drives the domestic economy. Beijing had recently ordered the developer to demolish 39 buildings under construction in Hainan. This has added further pressure on the development company.

Other property firms like the Kaisa Group have also been downgraded by international ratings agency Fitch to “restricted default.” Evergrande default in bond payments is considered to be the equivalent of the fall of Lehman brothers during the 2007 financial crisis.

Retail sales growth fell to 1.7 percent last month from 3.9 percent in November. However, demand from the United States and European markets lifted international trade to a record $3.36 trillion in 2021. The jobless rate in China was reportedly 5.1 percent at the end of December.

Omicron keeps wrecking the Chinese economy, with case numbers increasing on a steady basis. China’s “Zero-COVID” policy requires that entire regions get shut down when just a single case is identified. This has dealt a heavy blow to industries and other businesses that are already struggling with power shortages and other disruptions as they try to come out of the pandemic.

Meanwhile, the Party’s tech crackdown has resulted in massive selloffs in the sector dominated by big names like Tencent, JD.com, Alibaba, and Bilibili. The Hang Seng index has lost half its value since 2020.