The People's Bank of China (PBOC) unexpectedly lowered a key short-term interest rate Tuesday in a move that signals authorities are prepared to support China's slowing economy, though the cut is unlikely to significantly aid crucial sectors such as real estate, analysts said.
The regulator cut its 7-day reverse repurchase rate to 1.9% from 2%, the first decrease since August 2022, reinforcing its easing bias and spurring speculation of additional stimulus, said Robert Carnell, ING's Asia head of research. Carnell questioned whether the PBOC would also cut its one-year medium-term lending rate Thursday, as the bank recently lowered guidance on deposits, "so there does seem to be a general easing of policy going on."
Economists and investors are monitoring the PBOC's Thursday policy meeting and data including retail sales to gauge the health of the world's second-largest economy, which grew 4.5% year over year in the first quarter, below the government's 5% target. It expanded 3% in 2022, but missed the 5.5% goal due to COVID-19. Banks are worried about declining net interest margins.
While major central banks have hiked rates to curb inflation, China has maintained easing and Japan held policy steady. As global banks consider pausing tightening, China has stayed focused on growth.
Tepid recovery
"China's reopening has been quite tepid, with a catering-led consumer spending surge that already looks to be losing steam and manufacturing still struggling," said Carnell. "If retail sales — the one engine of growth — aren't delivering and other sectors fail to compensate, broader stimulus like rate cuts seem appropriate."
More measures such as "a moderate cut to benchmark lending rates" may have little impact as banks and markets already cut new loan rates, said Nomura economist Ting Lu in a June 13 note, and existing loan rates only change yearly.
"The risk of an economic double-dip is on the rise [...] and we believe Beijing still has to do more this year," Lu said.
Disappointing credit and aggregated financing data show the PBOC cut rates 10 basis points to reassure markets, said Bruce Pang, Jones Lang LaSalle's Greater China chief economist. New financing, including loans, was 1.56 trillion yuan in May, far below January's 4.93 trillion yuan, according to central bank data.
The cut "will mitigate disappointment if medium-term interest is not cut on Thursday," signaling the PBOC's easing stance, Pang said.
As of June 13, US$1 was equivalent to 7.14 Chinese yuan.
