China cuts short-term interest rates slightly in latest bid to help companies hit by US trade war
- One-year loan prime rate set to 4.20 per cent from 4.25 per cent following rate reductions by US Federal Reserve and European Central Bank last week
- But China left five-year prime rate, used as reference for mortgage loans, unchanged in further move to keep property prices under control
China trimmed its market reference rate for new short-term bank loans on Friday, taking another step towards helping companies hit hardest by the trade war with the United States and the overall domestic economic slowdown.
It follows the European Central Bank cutting its benchmark rates to minus 0.5 per cent last week while also restarting quantitative easing, and the US Federal Reserve announcing a cut of 25 basis points on Wednesday.
Analysts expect a further gradual reduction in Chinese interest rates in coming months as part of the government’s attempt to support economic growth without rekindling financial risks from excessive debt accumulation.
The government has made clear that it will seek to support growth without easing restrictions on the property market so as to keep housing price growth under control.
Cutting the cost of financing for businesses, especially smaller, private sector manufacturing firms, is one of the key pillars of the government’s plan to support the economy.
Chaoping Zhu, global market strategist of JPMorgan Asset Management, attributed the PBOC’s reluctance to cut the MLF rate to the earlier reduction in the amount of money that banks are required to hold in reserve, which injected 800 billion yuan (US$113 billion) of capital into the banking system on Monday.
“Financing costs might have declined to the [central bank’s] target” because of the reserve requirement cut, Zhu explained.
The decline in the one-year loan prime rate was generally in line with market expectations.
Zhang Jun, chief economist at Morgan Stanley Huaxin Securities, said the regulators focusing on banks’ cost of funds as a way to reduce their lending rates was a different approach than focusing on rates directly but that it should lead to the same results. The reduction of banks’ fundraising costs through the reserve requirement cut would enable banks to lower their lending rates that are used to calculate the loan prime rate.
The next opportunity for the central bank to cut banks’ costs will be November 5, when it will could cut the interest rate on a new MLF loans to replace a batch that is maturing.
“Considering the need to offset the downward pressure on the economy, [the central bank] will find it irresistible to adjust the MLF rate at that key time,” Zhang said.
The latest economic data released on Monday showed that Chinese economic growth continued to slow in August. Industrial production growth slowed to a new 17-year low of 4.4 per cent last month, while retail sales growth slowed to 7.5 per cent and January-August fixed asset investment growth also dropped to 5.5 per cent, according to data from the National Bureau of Statistics.