China announced it will continue implementing a new round of rate cuts – which is aimed at encouraging its slowing economy, which probably is going to slide to an estimated 5% growth in 2024. The People’s Bank of China or the PBC has significantly reduced the rates of lending with the five-year LPR was set at from 3.95% to 3.85%, and the one-year loan prime rate dropped to 3.35% from 3.45%.
The latest in a slew of steps to revive the collapsing real estate market, which has been severely impacted by the current financial crisis, is the reduction in mortgage reference rates, which follows earlier decreases in the same range. This follows a series of reductions in identical magnitudes.
Cutting rates is part of a broader effort by Beijing to get lending, consumer spending, and investment growing again as headwinds continue to slow its economy, including a lagging real estate market and weakened industrial output. The rate cut will more likely reduce the cost of business and household borrowing as officials hope it could help in reviving confidence in the economy.
Though the real estate sector is one of the major contributors that has led to the slowdown, it accounts for nearly a quarter of the country’s GDP. The sector was more sensitive to the slowdown. In the past quarters, the best thing that the Chinese government has done is to reduce the mortgage rates to revive this very important sector of its economy. Economies, however, continued slow and most analysts were of the view that rate cuts only would not spur long-term growth.
China’s deeper-set problems aside-China’s demographic decline, weakening global demand profile, and mounting set of geopolitical tensions-the broader strategic challenge may still require more than just monetary policy. Fiscal policies to spur infrastructure development, for instance, or policies to promote small businesses may be more effective.
The reactions in global markets to China’s second rate cut in two weeks have varied; the yuan fluctuated briefly but settled before the decline with renewed selling pressure in global commodity prices, including oil. Investors have great interest in knowing whether China can continue its economic recovery considering the varied internal and external uncertainties that confront it.
While the recent rate cuts signal a commitment on Beijing’s part to stable economy, many still believe that further measures are required for years to come in the wake of sustained growth.
