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China Central Bank Chief Flags More Interest Rate Cuts

AInvestThursday, Oct 17, 2024 11:56 pm ET
2min read
The People's Bank of China (PBOC) has recently announced a series of measures aimed at stimulating economic growth, including interest rate cuts and reductions in minimum down payments for housing purchases. These moves come as the Chinese economy faces a slowdown, with home prices falling and businesses reluctant to borrow. The central bank's actions are part of a broader effort to revive growth, halt a housing market crash, and stop a broad decline in prices.

The PBOC cut its benchmark seven-day interest rate to 1.5 percent, from 1.7 percent, and told commercial banks they would be allowed to reduce their reserve requirement ratio (RRR) by half a percentage point. This move will free the banks to lend an additional $140 billion to companies and households. The central bank also authorized lenders to cut interest rates on existing mortgages by about half a percentage point, reducing the rates for some existing mortgages to below 4 percent.

The minimum down payments for buying second homes were cut to 15 percent of the apartment's value, from 25 percent now. This move is intended to encourage investment in the housing market and boost consumer spending. The central bank also said it would allow commercial banks to pay less interest on deposits, potentially prompting consumers to spend more.


The PBOC's actions come as China's economy faces significant challenges. Home prices have fallen about 10 percent a year for the past three years, and many property developers have collapsed, undermining buyers' confidence. Many families have trimmed their personal spending after losing much of their savings due to falling housing prices. Apartments had been the main vehicle for building wealth in China, representing two-thirds or more of household assets.


The central bank's actions may not be enough by themselves to reverse the Chinese economy's slowdown. Surveys have shown that few businesses want to borrow money almost regardless of interest rates, as they worry about having enough sales within China to repay loans. However, the PBOC is ready to free banks to lend even more money if needed, potentially doubling the extra money available for lending in the coming months.

China's central bank is balancing the risks of further interest rate cuts with potential inflation and currency devaluation. By cutting interest rates and reducing the RRR, the PBOC is aiming to stimulate economic growth while managing the potential impact on inflation and the yuan's exchange rate. The central bank's actions are a step in the right direction, but they may not be sufficient to drive a turnaround in growth unless followed up with greater fiscal support.

The interest rate cuts by the Chinese central bank have the potential to impact the yuan's exchange rate compared to other major currencies. A decrease in interest rates can lead to a depreciation of the currency, making Chinese exports more competitive internationally. However, the PBOC has been intervening in the foreign exchange market to manage the yuan's value, aiming to maintain stability and prevent excessive volatility.

The recent interest rate cuts by the Chinese central bank may have spillover effects on neighboring economies and global financial markets. Lower interest rates in China can lead to capital outflows, as investors seek higher returns elsewhere. This can put downward pressure on the currencies of neighboring countries and lead to increased volatility in global financial markets. Additionally, the interest rate cuts can influence foreign investment in the Chinese market, potentially attracting more foreign capital if the yuan remains stable and the Chinese economy continues to grow.

In conclusion, the People's Bank of China has announced a series of measures aimed at stimulating economic growth, including interest rate cuts and reductions in minimum down payments for housing purchases. These moves come as the Chinese economy faces a slowdown, with home prices falling and businesses reluctant to borrow. The central bank's actions are part of a broader effort to revive growth, halt a housing market crash, and stop a broad decline in prices. The PBOC is balancing the risks of further interest rate cuts with potential inflation and currency devaluation, while also considering the impact on the yuan's exchange rate and the potential spillover effects on neighboring economies and global financial markets.
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