Surprising Move: China's Central Bank Slashes Rates to Bolster Struggling Economy

SHANGHAI/SINGAPORE, Aug 15 - In a remarkable twist, China's central bank has once again reduced key policy rates, marking the second such move in just three months. This unexpected maneuver reflects a vibrant commitment to invigorate the economic rebound.

Experts view this action as a potential precursor to a forthcoming reduction in China's lending benchmark loan prime rate (LPR) as well.

The imperative to counteract declining credit expansion and emerging deflation concerns in July has prompted the implementation of additional monetary measures aimed at halting the deceleration. Concurrently, uncertainties stemming from certain housing developers' default risks and a private wealth manager's payment delays have dented financial market confidence.

Tommy Wu, a senior China economist at Commerzbank, stated, "All of these factors underscore the necessity for swift policy action to prevent a steep decline in consumer and business confidence."

The People's Bank of China (PBOC) revealed a 15 basis point reduction to 2.50% from the previous 2.65% on 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans extended to select financial institutions. The objective of this monetary injection is to offset variables including tax obligations, ensuring that banking system liquidity remains reasonably robust. This intent was conveyed in an online statement by the PBOC.

In a recent Reuters poll of 26 financial experts, 77% of respondents, or 20 participants, anticipated the MLF rate to remain unchanged. A mere six participants foresaw a marginal rate decrease.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, noted, "This surprising rate cut is a swift response aimed at shoring up weak credit data and supporting China's recovery. This could potentially result in yuan depreciation pressure towards 7.3." Cheung further speculated that the PBOC might be aiming to enhance medium-term credit conditions through this asymmetric cut, potentially paving the way for a cut to the LPR, particularly the 5-year LPR, to extend support to the struggling property sector.

The MLF rate serves as a reference for the LPR, with markets often using the medium-term policy rate as a harbinger of changes to lending benchmarks. The upcoming monthly fixing of the LPR is scheduled for next Monday.

Simultaneously, the central bank executed a 204 billion yuan injection via seven-day reverse repos, coupled with a 10 basis point reduction in borrowing costs from the previous 1.90% to 1.80%, as stated in an online declaration.

China's approach stands out among global central banks, diverging from tightening cycles driven by high inflation concerns. While other economies are tightening, China is boldly loosening its monetary policy to shore up a faltering rebound.

This dynamic move has broadened the yield disparity with other major economies, especially the United States, placing additional pressure on the yuan and potentially inviting capital outflows.

Year-to-date, China's yuan has depreciated around 5% against the dollar, positioning it as one of the less favorable performing Asian currencies. At 0145 GMT, the yuan was trading at 7.2842 per dollar, compared to the prior close of 7.2580.

Yields on China's 10-year government bonds have eased to 2.56%, marking the lowest level since May 2020.

The PBOC's decision to lower key policy rates in June in order to stimulate the broader economy has been met with gradually weakening data in the subsequent months.

($1 = 7.2585 Chinese yuan)

Source : Reuters (Reporting by Winni Zhou and Rae Wee)