“Surprise Rate Cut by China Central Bank Aims to Revitalize Sluggish Economy”

“China Central Bank’s Surprise Rate Cut Signals Intensified Monetary Easing as Economy Struggles

SHANGHAI/SINGAPORE, Aug 15 – In an unexpected move, China’s central bank has slashed key policy rates for the second time in just three months. This decision underscores the government’s heightened efforts to bolster its faltering economic recovery.

Analysts speculate that this move could pave the way for a potential reduction in China’s lending benchmark loan prime rate (LPR) as early as next week.

With credit growth plummeting and deflationary risks on the rise as of July, experts suggest that additional monetary easing measures were imperative to counteract the slowdown. Furthermore, concerns over potential defaults among housing developers and payment defaults by a private wealth manager have also eroded confidence in the financial markets.”

“With all these factors combined, there’s a pressing need for policymakers to take swift action before both consumer and business confidence experience a steep decline,” emphasized Tommy Wu, Senior China Economist at Commerzbank.

The People’s Bank of China (PBOC) announced a reduction in the rate for 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans provided to certain financial institutions. The rate has been lowered by 15 basis points, now standing at 2.50% as opposed to its previous 2.65%.”

The infusion of cash aimed to offset various factors, including tax payments, and was implemented to “maintain a reasonably sufficient level of liquidity within the banking system,” as indicated by the PBOC in an online statement.

In a recent Reuters survey involving 26 market analysts, a significant majority of 20 participants, or 77%, anticipated that the central bank would keep the MLF rate unchanged. In contrast, merely six respondents predicted a slight reduction in the rate.

Ken Cheung, Chief Asian FX Strategist at Mizuho Bank, remarked, “This unexpected rate cut demonstrates a swift response to bolster the subdued credit data and support China’s recovery. It might also exert pressure on the yuan, potentially driving it toward a depreciation of around 7.3.”

“Particularly noteworthy, the PBOC’s decision may be aimed at providing support for medium-term credit conditions through this asymmetric rate cut. This move also paves the way for a potential reduction in the LPR, particularly the 5-year LPR, in order to bolster the struggling property sector.

The MLF rate has a guiding influence on the LPR, making the medium-term policy rate a crucial precursor for any adjustments to the lending benchmarks. The monthly determination of the LPR is scheduled for the upcoming Monday.

Simultaneously, the central bank injected 204 billion yuan through seven-day reverse repurchase agreements while concurrently reducing borrowing costs by 10 basis points to 1.80%, down from the previous 1.90%, as outlined in an online statement.

In contrast to other global central banks that are grappling with high inflation and are undergoing tightening cycles, China remains an exception. It has opted to implement monetary loosening measures to invigorate its decelerating recovery.

The rate adjustment on Tuesday has further widened the yield discrepancy with other major economies, especially the United States. This has placed added strain on the yuan and raised the risk of capital outflows.

Throughout this year, China’s yuan has exhibited a decline of around 5% against the dollar, making it one of the weakest performing currencies in Asia. At 0145 GMT, the yuan was trading at 7.2842 per dollar, compared to the prior close of 7.2580.

Yields on China’s 10-year government bonds have eased to 2.56%, marking the lowest level since May 2020.

Having already lowered key policy rates in June to support the broader economy, the recent data has shown increasing signs of weakness.

($1 = 7.2585 Chinese yuan)

Reported by Winni Zhou and Rae Wee; Edited by Kim Coghill and Jamie Freed”

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