By Sergey Manukov
The People's Bank of China (PBOC), China's main bank, has surprised the markets by cutting interest rates for the second time in three months to support the slowing economy. The Chinese government is awake and is trying to push the second largest economy on the planet, which so far has not recovered after the lifting of coronavirus restrictions. Today's rate cut, according to analysts, is likely to lead to a reduction in the main lending rate (LPR) next week.
The sharp slowdown in credit growth in July and the impending deflation are forcing China's financial authorities to further loosen monetary policy in order to stop the slowdown in the economy. As usual for the last couple of years, the financial system of the Celestial Empire is under pressure from a clearly protracted crisis in the construction sector, where another major developer is on the verge of bankruptcy. Alarming news from the financial sector has been added to the already familiar problems for builders - unexpectedly for everyone, the financial giant Zhongzhi Enterprise Group Co. has missed interest payments.
"All of this is forcing the financial authorities to act as quickly as possible to keep consumer and business confidence from eroding," Tommy Wu, senior China economist at Commerzbank, told Reuters.
On August 15, a major Chinese bank lowered the rate on the medium-term lending program (MLF) by 0.15% to 2.5% and injected 401 billion yuan (nearly $56 billion) under this program. The cash injection is intended to counteract a number of factors "to maintain liquidity in the banking system at a reasonably high level," according to a statement on the RVOS website. Three-quarters of 26 experts polled by Reuters failed to predict the actions of the main Chinese bank - 77% predicted that he would not touch the MLF rate.
"The unexpected rate cut was a quick response to data on worsening credit conditions and problems with the economic recovery," said Ken Cheung of Mizuho Bank.
The MLF rate is the benchmark for the LPR. Investors often try to predict the upcoming changes in the lending industry based on the rate of the medium-term lending program. The new lending rate should be announced next Monday, August 21.
The RVOS also injected 204 billion yuan into the financial system through reverse repurchase agreements at a rate of 1.8% (previously 1.9%).
The ERIA continues to swim against the tide and, unlike the vast majority of central banks, at least in large and developed countries, continues to loosen rather than tighten monetary policy to combat high inflation. For 7.5 months of 2023, the yuan depreciated against the US dollar by almost 5% and is currently one of the worst currencies in Asia. For the dollar this morning they gave 7.2842 yuan (7.2580 the day before). Rates on 10-year government bonds fell to 2.56%, the lowest level since May 2020. In June, the Chinese Central Bank lowered key rates to support the economy, but has not yet achieved the desired results.
This article originally appeared in Russian at expert.ru