Macroeconomics: Chinese banks' record rate cut

The People’s Bank of China (PBoC) announced 5Y loan prime rates were cut 25bps by local banks to 3.95% in February, the largest decline on record. By lowering mortgage costs significantly, the surprise move aims to support China’s weak property sector. As the chart below shows, real estate investment is contracting by almost 10% a year as falling prices encourage new buyers to delay purchases and indebted developers struggle to complete unfinished projects.

Source: Bank of Singapore, Bloomberg

In contrast, China’s banks left 1Y loan prime rates at 3.45% this month while the PBoC also kept its key 1Y Medium-term Lending Facility rate unchanged at 2.50% in February as the next chart shows.

Source: Bank of Singapore, Bloomberg

By reducing long-term interest rates while keeping shorter-term rates unchanged, officials aim to spur economic growth without causing the CNY to fall against the USD. As the last chart shows China’s currency is trading near 15-year lows of 7.20 against the greenback.

Source: Bank of Singapore, Bloomberg

Once the Federal Reserve reduces interest rates in response to falling inflation, we expect from June, the PBoC will be able to ease monetary policy more aggressively as Fed rate cuts will reduce downward pressure on the CNY. But lower interest rates alone in China will be unlikely to revive confidence in the subdued economy. Instead, further fiscal stimulus and property measures will be needed to keep GDP growth stable at 5% in 2024 and lay the foundations for a broader recovery in investor sentiment.

This article was first published by Bank of Singapore on February 20, 2024. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.

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