China cuts short-term interest rates slightly in latest bid to help companies hit by US trade war

China trimmed its market reference rate for new short-term bank loans on Friday, taking another step towards helping companies hit hardest by the trade war with the United States and the overall domestic economic slowdown.

The September loan prime rate, the average taken from 18 selected commercial banks, was set at 4.20 per cent for one-year maturities, down from the 4.25 per cent set in August, according to the National Interbank Funding Centre, a unit of the People’s Bank of China (PBOC).

The five-year prime rate, generally used as a reference rate for new mortgage loans, was kept unchanged at 4.85 per cent, the centre said.

It follows the European Central Bank cutting its benchmark rates to minus 0.5 per cent last week while also restarting quantitative easing, and the US Federal Reserve announcing a cut of 25 basis points on Wednesday.

Analysts expect a further gradual reduction in Chinese interest rates in coming months as part of the government’s attempt to support economic growth without rekindling financial risks from excessive debt accumulation.

The government has made clear that it will seek to support growth without easing restrictions on the property market so as to keep housing price growth under control.

Cutting the cost of financing for businesses, especially smaller, private sector manufacturing firms, is one of the key pillars of the government’s plan to support the economy.

However, the government must also improve smaller firms’ access to credit, by pushing banks to lend more. The central bank has tried to achieve this by advancing interest rate liberalisation so that interest rates better reflect market conditions. The new loan prime rate introduced last month is expected to benchmark at least half of new loans by year-end.

The PBOC can influence the loan prime rate through the rate it charges on its medium-term lending facility (MLF), which it uses to lend Chinese banks extra liquidity at low cost. It surprised the market earlier this week when it kept the rate on new MLF loans unchanged at 3.3 per cent, despite widespread market expectations that it could lower the rate modestly in response to the rate cuts by the US Federal Reserve and the European Central Bank.

Chaoping Zhu, global market strategist of JPMorgan Asset Management, attributed the PBOC’s reluctance to cut the MLF rate to the earlier reduction in the amount of money that banks are required to hold in reserve, which injected 800 billion yuan (US$113 billion) of capital into the banking system on Monday.

“Financing costs might have declined to the [central bank’s] target” because of the reserve requirement cut, Zhu explained.

The decline in the one-year loan prime rate was generally in line with market expectations.

Zhang Jun, chief economist at Morgan Stanley Huaxin Securities, said the regulators focusing on banks’ cost of funds as a way to reduce their lending rates was a different approach than focusing on rates directly but that it should lead to the same results. The reduction of banks’ fundraising costs through the reserve requirement cut would enable banks to lower their lending rates that are used to calculate the loan prime rate.

The next opportunity for the central bank to cut banks’ costs will be November 5, when it will could cut the interest rate on a new MLF loans to replace a batch that is maturing.

“Considering the need to offset the downward pressure on the economy, [the central bank] will find it irresistible to adjust the MLF rate at that key time,” Zhang said.

The latest economic data released on Monday showed that Chinese economic growth continued to slow in August. Industrial production growth slowed to a new 17-year low of 4.4 per cent last month, while retail sales growth slowed to 7.5 per cent and January-August fixed asset investment growth also dropped to 5.5 per cent, according to data from the National Bureau of Statistics.