Chinese Banks Cut Rates to Spur Economic Growth

Economists say interest-rate cuts will probably do little to revive growth in China’s flagging economy, where would-be borrowers are on edge over the threat of fresh disruptions to daily life from any new Covid-19 outbreaks and gloomy about their prospects against a worsening backdrop for growth and jobs. That is sapping demand for loans.

Economists expect policy makers will need to make more small cuts to interest rate this year, but Chinese officials have this year signaled a reluctance to engage in the kind of enormous stimulus response they unleashed when confronted by previous episodes of slowing growth, citing concerns including the risk of faster inflation and ballooning debt.

Data released last week showed economic activity slowed in July across the board, including factory output, investment, consumer spending, youth hiring and the real-estate sector, highlighting the breadth of the economic challenge facing policy makers in a politically sensitive year for leader

Xi Jinping,

who is expected to break with recent precedent and seek a third term in power this fall.

China recorded its weakest annual growth in two years in the second quarter, with gross domestic product expanding just 0.4% compared with a year earlier as Covid-19 lockdowns shut factories, snarled up transportation and shipping and left millions stuck at home. Data showed retail sales, industrial production and public and private investment slowed in July, while youth unemployment hit a new high, with almost a fifth of people aged 16 to 24 years old looking for work.

China’s slowdown adds to headwinds facing the global economy this year, which is also confronting war in Ukraine, rising interest rates and soaring inflation.

Senior officials last month effectively dropped their goal of recording an expansion of around 5.5% for the year as a whole, with China’s Politburo, the Communist Party’s top policy-making body, saying instead only that it hoped to keep growth within “a reasonable range” in the second half of the year.

The one-year loan prime rate offered by banks was lowered to 3.65% from a previous rate of 3.7%, while the five-year rate was cut to 4.3% from 4.45%, the People’s Bank of China said Monday. The PBOC publishes the rates based on averages of quotes it receives from 18 commercial banks, including

Industrial & Commercial Bank of China Ltd.

,

Bank of China Ltd.

and the China arms of

Citigroup Inc.

and

Standard Chartered

PLC.

Banks last lowered the one-year LPR in January, and the five-year rate, which is used to price longer-term loans such as mortgages, was lowered in May.

Economists said the heftier cut to the five-year rate than the one-year rate suggests policy makers, through commercial banks, are aiming to signal their support for China’s ailing real-estate market.

The property sector has long been a key driver of growth in the world’s second-largest economy but now it is shrinking as developers struggle with heavy debts, dragging down the wider economy. Unfinished projects have triggered protests and mortgage-payment strikes in several provinces and cities, deepening the gloom that is weighing heavily on consumer confidence.

However, Julian Evans-Pritchard, senior economist for China at Capital Economics in Singapore, said the cut won’t be felt by existing borrowers immediately and demand for loans is being hurt by a loss of confidence in the sinking real-estate market as well as Beijing’s Covid-19 strategy, which seeks to contain outbreaks with severe restrictions on movement.

“These are drags that can’t be easily solved by monetary policy,” he said in a note to clients Monday.

—Grace Zhu in Beijing contributed to this article.

Write to Jason Douglas at [email protected]

Economists say interest-rate cuts will probably do little to revive growth in China’s flagging economy, where would-be borrowers are on edge over the threat of fresh disruptions to daily life from any new Covid-19 outbreaks and gloomy about their prospects against a worsening backdrop for growth and jobs. That is sapping demand for loans.

Economists expect policy makers will need to make more small cuts to interest rate this year, but Chinese officials have this year signaled a reluctance to engage in the kind of enormous stimulus response they unleashed when confronted by previous episodes of slowing growth, citing concerns including the risk of faster inflation and ballooning debt.

Data released last week showed economic activity slowed in July across the board, including factory output, investment, consumer spending, youth hiring and the real-estate sector, highlighting the breadth of the economic challenge facing policy makers in a politically sensitive year for leader

Xi Jinping,

who is expected to break with recent precedent and seek a third term in power this fall.

China recorded its weakest annual growth in two years in the second quarter, with gross domestic product expanding just 0.4% compared with a year earlier as Covid-19 lockdowns shut factories, snarled up transportation and shipping and left millions stuck at home. Data showed retail sales, industrial production and public and private investment slowed in July, while youth unemployment hit a new high, with almost a fifth of people aged 16 to 24 years old looking for work.

China’s slowdown adds to headwinds facing the global economy this year, which is also confronting war in Ukraine, rising interest rates and soaring inflation.

Senior officials last month effectively dropped their goal of recording an expansion of around 5.5% for the year as a whole, with China’s Politburo, the Communist Party’s top policy-making body, saying instead only that it hoped to keep growth within “a reasonable range” in the second half of the year.

The one-year loan prime rate offered by banks was lowered to 3.65% from a previous rate of 3.7%, while the five-year rate was cut to 4.3% from 4.45%, the People’s Bank of China said Monday. The PBOC publishes the rates based on averages of quotes it receives from 18 commercial banks, including

Industrial & Commercial Bank of China Ltd.

,

Bank of China Ltd.

and the China arms of

Citigroup Inc.

and

Standard Chartered

PLC.

Banks last lowered the one-year LPR in January, and the five-year rate, which is used to price longer-term loans such as mortgages, was lowered in May.

Economists said the heftier cut to the five-year rate than the one-year rate suggests policy makers, through commercial banks, are aiming to signal their support for China’s ailing real-estate market.

The property sector has long been a key driver of growth in the world’s second-largest economy but now it is shrinking as developers struggle with heavy debts, dragging down the wider economy. Unfinished projects have triggered protests and mortgage-payment strikes in several provinces and cities, deepening the gloom that is weighing heavily on consumer confidence.

However, Julian Evans-Pritchard, senior economist for China at Capital Economics in Singapore, said the cut won’t be felt by existing borrowers immediately and demand for loans is being hurt by a loss of confidence in the sinking real-estate market as well as Beijing’s Covid-19 strategy, which seeks to contain outbreaks with severe restrictions on movement.

“These are drags that can’t be easily solved by monetary policy,” he said in a note to clients Monday.

—Grace Zhu in Beijing contributed to this article.

Write to Jason Douglas at [email protected]