Chinese Banks Reduce Benchmark Interest Rates, but Doubts Remain about Their Impact

Chinese banks have lowered benchmark interest rates on loans to households and businesses as part of efforts to revive the country's slowing economic recovery. However, economists argue that lower borrowing costs may not be sufficient for China's economy, as debt levels are already high, and prospects for jobs and growth remain uncertain.

Chinese Premier Li Qiang acknowledged the challenges faced by the country's economy and mentioned that the government is studying a package of policy measures to promote sustained economic growth. He emphasized the impact of the complex and severe external environment, including the slowdown in global trade and investment, on China's economic recovery process.

Among the policies being considered by Beijing is the issuance of special treasury bonds worth approximately one trillion yuan ($140 billion) to support new infrastructure investments. Looser rules to encourage multiple home purchases are also being explored to stimulate China's struggling real estate market.

Economists argue that, in addition to rate cuts, the government should consider tax cuts or other forms of financial support for small and midsize businesses. They also suggest implementing vouchers or similar measures to boost household consumption and foster a stronger economic recovery.

Serena Zhou, senior China economist at Mizuho Securities in Hong Kong, highlighted the need for more than just rate cuts, stating, "Rate cuts alone may not be enough."

The reduction in banks' loan prime rates, announced by the People's Bank of China, represents the final step in a series of policy easing measures implemented due to concerns over the country's economic health. The one-year loan prime rate was lowered from 3.65% to 3.55%, while the five-year rate, used to price mortgages, was cut from 4.3% to 4.2%.

Loan prime rates, set by a panel of banks, determine the terms offered to creditworthy borrowers for corporate loans and mortgages. The rates published by the People's Bank of China are based on averages of quotes received from 18 commercial banks, including Industrial & Commercial Bank of China, Bank of China, and the China arms of foreign banks such as Citigroup and Standard Chartered.

Capital Economics economists noted that the reduction in loan prime rates would lower debt-servicing costs for existing borrowers and potentially decrease the price of new loans. However, they expressed uncertainty about whether this change would significantly boost borrowing, as households and businesses continue to exhibit reluctance to take on additional debt.

The rate cut on loan prime rates follows the central bank's recent reduction in lending rates on three key tools used to provide cash to commercial banks. It also coincides with banks lowering the rates paid on customer deposits.

While the People's Bank of China adopts a looser policy stance to support the economy, other major global central banks, including the U.S. Federal Reserve, are signaling potential interest rate increases to address stubbornly high inflation.

China's economic slowdown presents additional challenges for Beijing, including strained relations with the U.S. and efforts by Washington and its allies to restrict China's access to advanced computer chips. Multinational manufacturers are reassessing China's role in their supply chains due to concerns about potential trade disruptions arising from tensions with Western countries.

By fLEXI tEAM