China’s central bank has cut interest rates in an attempt to revive flagging economic growth and prevent scores of debt-laden property owners from going bust in its boldest intervention to boost the economy since the pandemic.
Adopting a suite of measures to reduce borrowing costs, the People’s Bank of China cut interest rates on existing mortgages by 0.5 percentage points and supported new lending by reducing the level of reserves banks must set aside before making loans.
The bank’s governor, Pan Gongsheng, said he would also ease restrictions on borrowing to invest in stocks and shares on Chinese exchanges, boosting the Shanghai composite index by more than 4% within hours of the announcement. Oil prices rose, with Brent crude up more than 1% at nearly $75 a barrel.
The central bank was responding to concerns that the world’s second-largest economy will miss its own 5% annual growth target, a relatively modest ambition by historic standards.
Pan did not specify when the moves would come into effect, but said up to £50bn worth of assets could be used in the stock exchange programme to support extra investment.
To give the housing market a further stimulus, Pan said he would reduce the deposit needed to buy a second home from 25% to 15%.
The central bank expects the combination of lower interest rates and lower deposits to help about 50m households, reducing the total interest bill by about 150bn yuan (£16bn) a year, he said.
A growing crisis in China’s property market has unfolded since authorities cracked down on excessive borrowing by developers, leading many to default on their debts. Property developers and owners continue to cope with high mortgage payments, dragging on their ability to invest and grow.
Regulators have avoided making large-scale cuts to borrowing costs, fearing that the stimulus would reignite a boom in sales and values, creating a fresh property bubble.
“The move probably comes a bit too late, but it is better late than never,” said Gary Ng, senior economist at Natixis, adding: “China needs a lower-rate environment to boost confidence.”
Julian Evans-Pritchard, head of China economics at Capital Economics, said the moves represent “the most significant … stimulus package since the early days of the pandemic”, although “it may not be enough”. He added that a full economic recovery would “require more substantial fiscal support than the modest pickup in government spending that’s currently in the pipeline”.
Beijing is aiming for economic growth of about 5% for 2024. However, some investment banks including Goldman Sachs, Nomura, UBS and Bank of America have recently lowered their forecasts for China’s growth rate this year.
Pan said further monetary policy easing was on the cards later this year.
The latest move follows a significant rate cut by the US Federal Reserve last week, which gave China the opportunity to lower its own interest rates without putting pressure on the yuan.