Macroeconomics: China's central Bank cuts rates

This week the People’s Bank of China surprised by cutting its 7-day reverse repo rate 10bps to support growth as China’s recovery from the pandemic has waned.

As the chart below shows, the PBoC has reduced its benchmark interest rate in measured 10bps steps since the pandemic began in 2020 from 2.50% to 1.90% now.

Source: Bank of Singapore, Bloomberg.

The central bank’s latest cut comes after April’s and May’s data largely missed expectations.

After a strong start to 2023, China’s rebound from last year’s strict lockdowns has lost momentum.

The next chart shows May’s purchasing manager indices (PMIs) - key indicators of business sentiment - fell for both manufacturing and services to 48.8 and 54.5 respectively.

Readings below 50.0 signal activity is contracting.

Source: Bank of Singapore, Bloomberg.

May’s inflation rate was also just 0.2%YoY, May’s exports contracted 7.5%YoY on weaker overseas demand and May’s credit growth fell below 10%YoY on lacklustre loan demand as the last chart shows.

Source: Bank of Singapore, Bloomberg.

May’s data indicates China’s recovery remains uneven as consumption and services rebound while manufacturing and property remain weak.

The PBoC’s rate cut is thus likely to be followed by similar reductions in China’s other benchmark interest rates, benefitting risk assets as policymakers aim to stimulate China’s flagging reopening.

We think China’s GDP is still set to rise from 3.0% to 5.9% growth this year as last year’s lockdowns fade.

But officials, wary of fuelling debt, are unlikely to ease more aggressively even if investor sentiment stays subdued.

This article was first published by Bank of Singapore on June 14, 2023. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Bank OCBC NISP Private Banking Tbk. or its affiliates.

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