China cuts key policy interest rate for first time since January as major economic growth indicators slow

Another major policy rate, the seven-day reverse repo, was also lowered to 2.0 per cent from 2.1 per cent
The rate cuts, which will help boost economic activities, came as July data released by the National Bureau of Statistics on Monday indicates worrying trends

China's economic recovery

Frank Tangin Beijing

Published: 10:54am, 15 Aug 2022

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China has cut a key policy interest rate by 10 basis points – the first cut since mid-January – as its economy is still under pressure from coronavirus outbreaks, and as tensions with the United States remain elevated amid a series of high-profile Taiwan visits this month.

The People’s Bank of China (PBOC) unexpectedly lowered the rate of one-year medium-term lending facilities to 2.75 per cent from 2.85 per cent when selling 400 billion yuan (US$59.3 billion) of the tool on Monday morning.

The move is set to fully meet the needs of financial institutions, the central bank said in its online statement.

Another major policy rate, the seven-day reverse repo, was also lowered to 2.0 per cent from 2.1 per cent.

The rate cuts, which will help boost economic activities, came as July data released by the National Bureau of Statistics on Monday indicated worrying trends, including still weak consumption.

The growth of retail sales, a gauge of domestic consumption, slowed to 2.7 per cent last month from 3.1 per cent in June, government data showed.

And fixed-asset investment growth from January-July slowed to 5.7 per cent, down from 6.1 per cent growth in the first six months, while fixed-asset investment continued to drag. Industrial output growth moderated to 3.8 per cent in July from 3.9 per cent in June.

The PBOC’s loosening approach, compared with the much more aggressive rate hikes in the US and other Western economies, would introduce further pressure on China in terms of cross-border capital flows and the yuan exchange rate, but such considerations have apparently given way to rising worries over the downward economic pressure.

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The lower-than-expected July lending data, released on Friday, already sounded an alarm in the Chinese economy.

New bank loans plunged 37.1 per cent from a year earlier to 679 billion yuan (US$100.7 billion) last month, indicating rather weak domestic demand as the coronavirus pandemic has taken a heavy toll on Chinese businesses and individuals.

China’s top leadership insisted on striking a balance between growth, pandemic control and development security in its quarterly economic analysis conference at the end of July. They, however, didn’t mention the “around 5.5 per cent” annual growth target, despite vowing to achieve the best economic outcome for the year.

The world’s second-largest economy is widely expected to miss the annual target after reporting only a 2.5 per cent growth in the first half of this year.