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Monday, October 2, 2023

China reduces primary interest rate to bolster economy

China’s central bank cut a key interest rate to counter COVID-induced growth slowdown in the second-largest global economy. Labour market uncertainty and global economic sluggishness have hindered activity, weakening demand for Chinese goods.

The struggling real estate sector, with major developers facing bankruptcy and project delays, adds to growth challenges.

Following a recent similar move, the central bank lowered the one-year loan prime rate from 3.55% to 3.45%, aiming to stimulate economic activity.

The five-year LPR for mortgage pricing remained at 4.2%. These historic lows are intended to encourage more favorable loans from commercial banks.

This action goes against the trend of rising global interest rates aimed at curbing inflation. China’s post-COVID recovery, since the end of 2022, has lost momentum. Household loans hit a 2009 low, indicating a faltering recovery.

The central bank also reduced its medium-term lending facility rate and regulators discussed “financial support” to manage risks.

Analysts expected a more substantial LPR cut, and market response was unenthusiastic, with Hong Kong and Shanghai stocks falling.

The central bank’s decision coincides with property giant Country Garden’s crisis and ongoing growth challenges tied to consumption, labor market uncertainty, and global economic slowdown.

Amidst grim figures, officials face pressure to introduce an economic recovery plan, though Beijing’s cautious approach due to debt concerns is evident. Authorities are focusing on supporting the private sector and consumption.

The economic slowdown threatens the five-percent growth target, with Beijing defending its ability to sustain global growth despite Western skepticism.

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