Chinese stocks fell and the currency fell on Monday after China’s central bank announced a smaller-than-expected cut in key interest rates.
Many investors and economists expected the Chinese government to act more decisively on interest rates as the country faces falling apartment prices, weak consumer spending and widespread debt problems.
The central bank, the People’s Bank of China, cut the benchmark one-year interest rate used for most business loans by just a tenth of a percentage point, leaving the five-year interest rate used to set mortgage prices at all. there was no change. The small reduction in one-year loans marks the second time in two months that the government has cut lending rates for commercial banks.
Economists said Monday’s small cuts were the latest sign that the government’s usual tools to deal with the economic slowdown may be losing some of its effectiveness. .
“This will only provide modest support for credit growth and broader economic activity,” London-based research firm Capital Economics said in a report.
Global investment banks are rushing to revise down their growth forecasts for the Chinese economy, with the Chinese government setting a growth target of “around 5%” this year. On Monday, just before the rate cut, UBS cut its growth forecast to 4.8% this year and 4.2% next year. Japan’s Nomura is even more pessimistic, last Friday predicting 4.6% growth this year, while keeping its growth forecast at 3.9% next year.
The CSI 300 index of China’s biggest companies trading in Shanghai and Shenzhen fell 1.4% on Monday, while Hong Kong’s Hang Seng index, which also includes large Chinese companies, fell 1.8% to its lowest since November. became. Hang Seng fell for seven consecutive trading days, dropping more than 12% in August.
The yuan closed below 7.3 yuan to the dollar in Shanghai trading on Monday. The yuan was at a level the Chinese government tried to maintain last November, when it was the weakest since 2007. The yuan fell further in Hong Kong during Monday’s trading. Not very tightly controlled. It cost more than 7.335 RMB to buy a dollar there by mid-afternoon.
Beijing authorities are using the country’s cash reserves and state-owned banks to buy and sell the currency to limit the volatility of the yuan’s value against the dollar.
The yuan suddenly rebounded slightly in the late trading hours of Shanghai and Hong Kong. The Chinese government has a long history of intervening in the currency market at the close of trading to prevent sharp fluctuations in closing prices.
As a result, many investors view the intraday movement of the renminbi, also known as the yuan, as a more accurate measure of its value.
“Intraday markets are likely to point the direction of the yuan, while closing prices are likely to point to government action,” said Diana Choileva, chief economist at Enodo Economics in London.
Monday’s rate cut was aimed at making it easier for businesses and households to borrow money and pay off existing loans. But most loan rates reset each year, often at the beginning of the year, so the full effect of the cuts could be delayed.
In talks with state commercial banks, the central bank cut the one-year benchmark interest rate for corporate loans to 3.45% from 3.55%. The base interest rate for five-year loans remained unchanged at 4.2%.
A Reuters poll of 35 economists last week showed that all expected the central bank to cut interest rates on not only one-year but also five-year loans.
The central bank cut borrowing costs for commercial banks by 0.15 percentage points last week. Policymakers cut the one-year lending rate more modestly and kept the five-year rate unchanged, effectively boosting banks’ profit margins.
China’s commercial banks have made huge loans to property developers and home buyers in recent years, the same groups hardest hit by China’s housing crash.
More than 50 real estate developers have already defaulted or suspended payments on foreign bonds. Country Gardens has become the nation’s largest troubled developer, with nearly $200 billion in outstanding claims.
Opaque accounting in China’s state-owned financial system makes it difficult for outsiders to discern the scale of banks’ property-related losses. Wider lending margins could allow banks to build up more reserves to offset these losses.