In a significant move aimed at reviving its faltering economy and stabilizing the housing market, China has cut its benchmark lending rates as part of a broader set of measures initiated by the central bank to spur growth. On Monday, the one-year Loan Prime Rate (LPR) was reduced from 3.35% to 3.10%, while the five-year LPR dropped from 3.85% to 3.60%. These cuts mark the largest reductions within the forecasted 20-25 basis points range outlined by the People’s Bank of China (PBOC) Governor Pan Gongsheng in recent speeches and are slightly larger than the 20 basis point cuts predicted by most economists.
This move reflects China’s deepening concerns about its slowing economic momentum, coupled with the worsening housing market crisis. The nation is grappling with a mix of deflationary pressures, rising youth unemployment, and sluggish consumer spending. Meanwhile, a highly leveraged real estate sector remains in turmoil as major property developers face liquidity constraints, and homebuyers hold back due to plunging property values.
China’s economic trajectory has been under pressure since the global pandemic hit in 2020, with the country struggling to achieve robust recovery. Despite earlier optimism about a post-COVID economic boom, China’s economy has faced a series of challenges this year. According to official figures, growth slowed dramatically in the second quarter, and various economic indicators have signaled continued weakness.
Several factors have contributed to this downturn. The real estate sector, a long-standing pillar of Chinese economic growth, has faced unprecedented challenges. The collapse of property giant Evergrande last year, coupled with a series of defaults by other developers, has had a ripple effect on the broader economy. Homebuyers, spooked by falling property values and construction halts, are delaying purchases, leading to a nationwide decline in housing demand.
Amid these challenges, China’s central bank has taken aggressive measures to support the economy, with the rate cuts forming part of a wider stimulus package aimed at encouraging lending and boosting demand.
The LPR serves as the benchmark for most new and outstanding loans in China. The one-year rate directly influences short-term loans taken out by households and businesses, while the five-year LPR plays a crucial role in determining mortgage rates and other long-term borrowing costs. By lowering both rates, the PBOC hopes to stimulate more borrowing and investment across sectors, which should, in turn, boost economic activity.
These rate cuts follow several measures announced by the PBOC in recent weeks aimed at promoting liquidity. In late September, the central bank hinted that more reductions in the Reserve Requirement Ratio (RRR)—the amount of cash that banks must hold in reserve—could be on the horizon. Lowering the RRR frees up more cash for banks to lend, further supporting liquidity in the economy.
PBOC Governor Pan Gongsheng reiterated last week that a further reduction in the RRR, potentially in the range of 25 to 50 basis points, was “highly likely” by the end of the year, contingent on the liquidity situation. This ongoing easing of monetary policy signals the government’s commitment to doing whatever is necessary to prop up economic activity and stabilize the financial system.
Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corporation (OCBC), stated, “The market likely looks past this expected LPR cut, and forward to the prospect of more easing.” She added that another cut to the RRR before the year’s end is “highly likely,” further highlighting the government’s willingness to continue stimulating growth.
China’s housing market, which accounts for roughly a quarter of the economy, has been at the heart of its current crisis. Home prices in major cities have been falling for months, leading to a sharp decline in new home purchases. This is compounded by financial distress among large developers, such as Evergrande and Country Garden, which has rattled both domestic and international investors.
The five-year LPR cut is seen as a direct response to these issues. As it serves as the reference for mortgage rates, lowering it is designed to make home loans more affordable, encouraging homebuyers to return to the market. With the Chinese government anxious to stabilize the housing sector, the rate cuts represent a calculated effort to prevent further declines in property prices, which have already led to widespread concern about social stability.
While the central bank’s rate cuts are a welcome relief for homebuyers, the overall effectiveness of these measures remains uncertain. Although mortgage rates have decreased, potential buyers are still reluctant to enter the market due to fears about continued price drops and incomplete housing projects. Moreover, banks are becoming increasingly cautious about lending to property developers, further exacerbating the liquidity crisis within the sector.
In currency markets, the offshore yuan remained steady following the rate cut announcement, trading near 7.12 per U.S. dollar. Currency market participants have largely priced in expectations for continued monetary easing, and as a result, the yuan has been relatively stable against the U.S. dollar in recent weeks.
On the bond market front, the 30-year government bond yield saw little movement, holding at around 2.3% amid thin trading volumes. Investors appeared to adopt a wait-and-see approach, given the high likelihood of additional policy moves by the PBOC in the coming months.
China’s stock markets, however, remained subdued, with investors cautious about the long-term outlook. Many traders have expressed concerns about the sustainability of economic growth in light of persistent structural issues, including high debt levels in both the public and private sectors.
One of the key consequences of the rate cuts is the pressure it puts on Chinese banks, especially state-owned lenders. In response to the lowering of lending rates, several of China’s largest banks have also reduced their deposit rates to maintain profitability. This step is crucial as the narrowing difference between deposit rates and loan rates erodes banks’ net interest margins, which are a key source of profits for financial institutions.
Lowering deposit rates is seen as a necessary measure for banks to offset the negative impact of lower loan rates. However, this move has also led to dissatisfaction among savers, who now face lower returns on their bank deposits. With consumer confidence already shaky, this development could further weaken household spending and investment, undermining some of the central bank’s efforts to boost domestic demand.
China’s economic health is of global significance, and the central bank’s latest moves are being closely watched by international markets and policymakers. As the world’s second-largest economy, China’s slowdown could have far-reaching consequences, particularly for countries that are heavily reliant on Chinese demand for commodities, goods, and services.
The continued weakness in the real estate market, combined with lackluster consumer demand, has already dampened the prospects of a strong recovery in global trade. Major exporters to China, such as Germany, Australia, and Brazil, could see reduced demand for key goods like machinery, raw materials, and consumer products, putting further strain on their own economies.
Furthermore, China’s monetary easing could also affect the global bond and currency markets. The PBOC’s actions to weaken the yuan through rate cuts make Chinese exports more competitive, which could increase trade tensions with other countries, particularly the United States. At the same time, China’s yield curve may become more appealing to foreign investors, attracting capital flows into Chinese bonds, even as the country’s economic outlook remains uncertain.
Looking forward, it seems likely that the PBOC will continue its monetary easing strategy in the coming months. With inflationary pressures low and deflationary risks looming, there is room for further interest rate cuts and reductions to the reserve requirement ratio. However, the effectiveness of these measures remains a subject of debate. Structural reforms, particularly in the housing market and financial sector, may be necessary to achieve sustained growth.
Many economists argue that while the central bank’s monetary easing provides short-term relief, it does not address the underlying issues that have contributed to the economic slowdown. These include high levels of corporate and local government debt, as well as a property market that has become overly reliant on speculative investment.
Moreover, with the global economy facing a potential slowdown, particularly in key export markets such as Europe and the United States, China’s export-driven growth model may be increasingly unsustainable. To mitigate these risks, the Chinese government may need to shift its focus toward fostering domestic consumption and investment in emerging industries, such as green technology and digital infrastructure.
China’s latest rate cuts signal its determination to revive an economy facing significant headwinds, but the path to recovery remains fraught with challenges. The central bank’s aggressive monetary easing, while providing much-needed liquidity and lowering borrowing costs, may not be enough to solve deeper structural problems in the housing market and the broader economy.
