China Trims Rates to Revive Growth; Markets Sink on Lower-Than-Expected Cut

The Chinese central bank lowered its prime lending rate to 3.45 percent from 3.55 percent on Monday amid reports that the world's second largest economy is struggling to return to health after a bruising Covid-19 pandemic.

China went into delfation even as major economies in the world are struggling with high inflation, indicating that the slump in consumer spending in China is dragging the economy down.

People's Bank Of China Reuters

According to data released two weeks ago, China's inflation gauge dropped 0.3 percent in July, after having flatlined in June, showing that the economy has fallen into deflation. The latest Consumer Price Index data released by the National Bureau of Statistics came a day after data showed China's imports and exports sank in July. While exports fell by 14.5 percent, imports dropped 12.4 percent, indicating that economic growth in China could slow further this year.

Analysts were surprised by the small decrease in the benchmark interest rate, adding that the PBOC was expected to offer bigger support to the economy's revival. "We will need bigger stimulus package to boost confidence and in turn drive up consumption and growth. Without it, the economy is risking faltering into deflation which will be harder to revive," said Jun Bei Liu from Tribeca Investment Partners, according to the BBC.

Chinese Yuan
Representational Image Twitter

Investors were disappointed with the meagre rate trimming by the Chinese central bank. Stock markets in Hong Kong and mainland China sank on the news, and the Chinese currency weakened. While Hong Kong's Hang Seng index closed 1.8 percent down, the Shanghai Composite index was down 1.2 percent.

On Monday, UBS downgraded its economic forecast for China. According to the investment bank, China is expected to grow 4.8 percent in 2023 and 4.2 percent in 2024, compared with the previous projections of 5.2 percent and 5 percent, respectively. UBS said downgrade reflected a deeper and longer property downturn and weakening global demand. "China's economic growth has decelerated since April as the property downturn deepened. The government's policy support has arguably been less than was indicated earlier in the year, and less than we expected," the China specialists remarked.

Some analysts expect more rate cuts could follow. "More rate cuts could be announced in conjunction with government spending, as well as targeted measures to help the property market," Catherine Yeung of Fidelity International said, according to BBC.