Volkswacht Bodensee - China central bank cuts two key rates to support flagging economy

Beijing is battling an unprecedented crisis in the country's vast real estate sector, continued weak consumption and a high youth unemployment rate, while geopolitical tensions with Washington and the European Union threaten its foreign trade.

A year and a half after the lifting of health restrictions that stunted economic activity, the much-hoped-for post-Covid recovery was brief and less robust than expected.

Monday's rate cuts, anticipated by some economists, are supposed to encourage commercial banks to grant more credit and at more advantageous rates.

The one-year loan prime rate, which constitutes the benchmark for the most advantageous rates that banks can offer to businesses and households, was cut from 3.45 percent to 3.35 percent, having been last lowered in August.

The five-year rate, the benchmark for mortgage loans, was reduced from 3.95 percent to 3.85 percent, following a trim in February.

The two rates are at historic lows and the cuts come days after a key meeting of the Communist Party in Beijing.

Monday's decision represented a "step in the right direction", said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, in a note, adding that he expected more down the line.

"But monetary policy is not the most important policy tool," said Zhang. "The economic outlook in (the second half of the year) critically depends on how supportive fiscal policy will become."

- Sluggish growth -

The economy slowed sharply in the second quarter, with data last Monday showing growth of 4.7 percent, well below expectations and sharply down from 5.3 percent in the previous three months.

The reading is also the weakest since the beginning of 2023, when China lifted its draconian Covid restrictions, and off Beijing's official target of five percent for the year.

Furthermore, retail sales only increased two percent on-year in June, highlighting the tough job leaders face to boost consumption.

Monday's cuts come after last week's Third Plenum gathering of leaders concluded with few major announcements bar pledges to tackle "risks" in the economy.

However, officials pledged Friday to help ease debt pressure on local governments through reforms to the tax system.

Worries about local government finances have been growing for years and have been made worse by a chronic real estate debt crisis and in April ratings agency Fitch lowered its outlook on China's sovereign credit.

Local governments in China face a ballooning debt burden of $5.6 trillion, according to the central government, raising worries about wider stability.

The full text of a decision reached at the Third Plenum released Sunday by state news agency Xinhua included the call for establishing "a system for monitoring and regulating all local government debt as well as long-term mechanisms for preventing and defusing hidden debt risks".

Pinpoint's Zhang said the statement showed that while the Third Plenum did not change official policy goals, "it introduced new measures to achieve such objectives".

R.Kloeti--VB