China Slashes Key Interest Rate in Bold Move as Economic Recovery Stumbles
As the second-largest economy in the world battles to recover from the effects of the pandemic, China’s central bank has reduced one of its main interest rates for the second time in three months.
The prime rate for a one-year loan from the People’s Bank of China (PBOC) was reduced from 3.55% to 3.45%.
A real estate crisis, declining exports, and subpar consumer spending have all hampered the nation’s post-Covid recovery.
The reduction occurs when other significant economies hike rates to combat rising costs.
The majority of China’s household and corporate loans are based on the PBOC’s one-year rate, which was recently reduced in June.
The decision, according to Jun Bei Liu of Tribeca Investment Partners, is unlikely to have a significant impact, but it does show the Chinese government’s dedication to rebuilding the economy.
“A larger stimulus program will be required to increase confidence, which would then increase spending and growth. Without it, she continued, the economy runs the risk of tumbling into deflation, which will be more difficult to recover from.
Additionally, economists had anticipated that the bank would reduce the prime rate on its five-year loan, to which all mortgages in the nation are tied. At 4.2%, it remained constant.
Short- and medium-term rates were also lowered in an unexpected move last week.
According to Catherine Yeung, Investment Director at Fidelity International, “More rate cuts could be announced in conjunction with government spending, as well as targeted measures to help the property market.”
Beijing is working to rebuild trust, but officials will also take the long-term effects of the regulations into consideration, she added.
Following the epidemic, which caused most of the world to shut down, China’s economy has struggled to recover from a number of significant problems.
When crisis-hit real estate behemoth Evergrande filed for bankruptcy protection in the US last week, the severe issues in its real estate industry were brought to light.
A multibillion-dollar agreement with creditors is still being negotiated by the deeply indebted corporation.
Another of the largest real estate companies in the nation, Country Garden, issued a warning earlier this month, predicting a loss of up to $7.6 billion (£6 billion) for the first half of the year.
Official data revealed that China has entered deflation for the first time in more than two years during the same week.
That occurred while the official consumer price index, a gauge of inflation, decreased by 0.3% from a year ago last month.
Meanwhile, according to government data, China’s imports and exports plunged significantly in July as a result of a weakening global economy.
Beijing has also ceased disclosing data on youth unemployment, which some believed to be an important sign of the nation’s decline.
China’s urban 16–24 year old unemployment rate reached a record high of more than 20% in June.
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