China Cuts Prime Rate to 3.45%

China Cuts Prime Rate to 3.45%

China’s central bank has cut a key interest rate amid concerns about the post-pandemic recovery of the world’s second-largest economy. The People’s Bank of China reduced its one-year loan prime rate (LPR) by 0.1 percentage point to 3.45% while the five-year rate was kept unchanged at 4.2%. 

Economists had expected a cut of 0.15 percentage points for both rates.

“The underwhelming LPR announcement strengthens our view that the PBOC is unlikely to embrace the much larger rate cuts that would be required to revive credit demand. Hopes for a stimulus-led turnaround in economic activity largely depend on the prospect of greater fiscal support,” analysts at Capital Economics wrote in a research note on Monday.

The five-year loan prime rate is the reference rate for mortgages in China. The lack of a rate cut disappointed investors hoping for a boost to the real estate sector as Country Garden Holdings, one of China’s biggest property developers, faces a severe liquidity crunch

Stocks in China suffered, with Hong Kong’s Hang Seng Index falling 1.8% on Monday and mainland markets also dropping. They were the biggest losers in mixed Asian trading, as Japan’s Nikkei 225 gained 0.4%.

Disappointing stimulus raises questions about China’s ability to restore its economic growth to pre-pandemic levels.

Meanwhile, Goldman Sachs economist Maggie Wei in a note described the LPR cut as “disappointing”, adding that it “would not help with building confidence” as Chinese authorities pursue an economic recovery. The move “can even backfire if market participants interpret these easing measures as policymakers’ unwillingness to deliver even moderate policy stimulus”, Wei said.

Beijing last week acknowledged economic “difficulties”, but blasted Western commentators for doubting the country’s growth prospects. Eventually, they will for sure be proven wrong,” Wang Wenbin, a Ministry of Foreign Affairs spokesman, said.

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