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China unexpectedly reduced several major short and long-term interest rates on Monday, marking its first comprehensive rate cut since August last year. This move signals China’s intent to stimulate growth in the world’s second-largest economy, coming just days after a Communist Party leadership meeting.
The People’s Bank of China (PBOC) cut its key short-term policy rate, market operations rates, and benchmark bank lending rates following weaker-than-expected second-quarter economic data. The rate cuts come as China faces looming deflation, a prolonged property crisis, surging debt, and weak consumer and business sentiment. Additionally, trade tensions are rising as global leaders become increasingly wary of China’s export dominance.
“The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for ‘achieving this year’s growth target’ by the third plenum,” said Larry Hu, chief China economist at Macquarie.
The PBOC announced it would reduce the seven-day reverse repo rate to 1.7% from 1.8%, the first such cut since August 2023, and improve the mechanism of open market operations. Shortly after, China also lowered its benchmark lending rates by the same margin. The one-year loan prime rate (LPR) was decreased to 3.35% from 3.45%, and the five-year LPR was reduced to 3.85% from 3.95%. Additionally, the PBOC lowered the rates on its standing lending facility (SLF) loans to commercial banks by the same amount.
Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, noted that growing expectations for the Federal Reserve to start cutting interest rates provided the PBOC with room to ease its policy, especially given the pressure on the yuan due to a wide yield gap with the dollar.
The official Xinhua news agency, citing unnamed sources close to the PBOC, described the rate cut as “decisive” and reflective of the central bank’s determination to bolster economic recovery, aligning with the plenum’s aims to achieve this year’s growth target.
The PBOC also adjusted its lending program, lowering collateral requirements for medium-term lending facility loans starting in July. Analysts believe this change will allow banks to hold fewer long-term bonds for collateral, enabling them to sell or trade more, which supports the central bank’s mission to stabilize longer-term yields, rein in a bond bubble, and create a steeper yield curve.
Following the rate cuts, China’s yuan fell to a near two-week low of 7.2750 per dollar before recovering some losses. Chinese sovereign bond yields fell across the curve, with 10-year and 30-year yields dropping as much as three basis points before stabilizing at 2.24% and 2.45%, respectively. China’s 30-year treasury futures for September 2024 delivery rose 0.33% in afternoon trading on Monday.
“The fact that the PBOC didn’t wait for the Fed to cut first indicates that the government recognizes the downward pressure on China’s economy,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management. He expects further rate reductions in China once the Fed begins its rate-cutting cycle.
China’s rate cuts are aimed at “strengthening counter-cyclical adjustments to better support the real economy,” the PBOC said in a statement. The announcement follows the PBOC’s recent decision to revamp its monetary policy transmission channel. PBOC Governor Pan Gongsheng stated last month that the seven-day reverse repo essentially functions as the main policy rate.
“This is also a reflection of the improvement of the market-oriented interest rate mechanism,” Xinhua quoted the source as saying.
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