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China cuts rates for the first time since August as it tries to boost economic performance

AInvestMonday, Jul 22, 2024 8:37 am ET
2min read

China recently enacted significant monetary policy adjustments, surprising markets by cutting major short and long-term interest rates for the first time since August of the previous year. The People's Bank of China (PBOC) reduced the seven-day reverse repo rate to 1.7% from 1.8%, and the one-year loan prime rate (LPR) to 3.35% from 3.45%. Additionally, the five-year LPR was cut to 3.85% from 3.95%. These moves aim to stimulate growth in the world's second-largest economy, which has shown signs of weakening.

The rate cuts are crucial as they signal the PBOC's intent to bolster economic activity amid several challenges, including the threat of deflation, a prolonged property crisis, surging debt, and low consumer and business confidence. These adjustments come in response to disappointing second-quarter economic data and the recent Communist Party leadership meeting. The cuts are expected to support liquidity and lower borrowing costs, which could help counter the economic slowdown.

Following the rate cuts, the Chinese yuan dropped to a near two-week low against the dollar, reflecting market reactions to the increased supply of yuan and lower interest rates. Additionally, Chinese sovereign bond yields fell, indicating a positive response from the bond market to the PBOC's measures. Analysts suggest that these rate cuts might be the beginning of a series of adjustments, especially if the Federal Reserve also begins cutting rates.

The Communist Party's Third Plenum meeting, which concluded just days before the rate cuts, produced a comprehensive 50-page roadmap aimed at addressing long-term economic challenges. This plan aligns with President Xi Jinping's vision of transforming China into a "high-standard socialist market economy" by 2035. The roadmap includes over 300 reforms focused on improving social welfare, local government finances, and private property rights, as well as enhancing the business environment for foreign investors.

The reforms emphasize the need for continued reform and opening up, with promises of equal market access and support for both private and state-owned enterprises. The plan also prioritizes national security, which may concern foreign companies operating in China due to the expanding definitions of what might affect national security. Despite these concerns, the reforms are seen as crucial steps to address economic imbalances and support sustainable growth.

While the roadmap lays out broad objectives, the actual implementation details and regulatory changes will be critical. The success of these reforms will depend on the government's ability to effectively implement the proposed measures. Analysts at UBS note that if well-implemented, these measures could improve resource allocation, contain financial risks, and boost investor confidence.

Overall, China's recent rate cuts and the comprehensive reform plan from the Third Plenum demonstrate the government's proactive approach to addressing both immediate and long-term economic challenges. These measures aim to stabilize the economy, support growth, and ensure the country remains on track to achieve its ambitious development goals by 2035.

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