China Cuts Interest Rates First Time Since April 2020

China’s central bank cuts the interest rate of its medium-term loans for the first time since April 2020, in an attempt to cushion any economic slowdown.

The People’s Bank of China (PBOC) said on Monday that it was lowering the interest rate on 700 billion yuan ($110.19 billion) worth of one-year medium-term lending facility (MLF) loans. The bank lowered the interest rate by 10 basis points, from 2.95% to 2.85%.

Additionally, the PBOC also reduced the seven-day reverse repurchase rate from 2.20% to 2.10%.

What Does the Data Say?

China’s pandemic-defying economic growth slowed down in the final months of 2021. Data showed that gross domestic product rose by 4% in the final quarter of 2021. Although this figure was higher than the 3.3% rise predicted by economists, it still fell short of the previous three months of the year.

For the full year, China’s economy grew by 8.1%. This was well above the government’s target of “over 6%”. However, much of that growth came in the first half of the year, with the economy witnessing a series of shocks as 2021 drew to a close.

What Do the Experts Say?

NBS spokesman Nig Jizhe warned that China’s domestic economy is facing increasing uncertainty in 2022.

“China’s economic development is under the triple pressures of contraction of demand, supply shock and weakening expectations,” he stated.

Meanwhile, Ms. Sian Fenner, lead Asia economist at Oxford Economics, wasn’t too optimistic either. In an interview with Bloomberg TV, she said: “Growth will continue to be weighed down by the property sector and, of course, the zero-Covid-19 policy that China is going to continue with. Retail sales numbers are still quite telling that the zero-Covid-19 policy is still wearing on consumers, and we haven’t seen the recovery that we’ve been seeing in the industrial sector.” 

What are China’s Major Concerns for 2022?

Amidst China’s impressive growth numbers for 2021, there have been growing concerns about the effects of Beijing’s regulatory crackdown on businesses. 

There are also two other primary issues to worry about. First, the rampant spread of the Omicron variant of Covid-19. Second, the financial health of some of the country’s biggest property firms.

China’s property sector is attracting less investment. This is mainly because some of its biggest developers face a debt crisis. Since the investment sector accounts for nearly a quarter of China’s GDP, a sharp slump could adversely impact its economic growth.

Additionally, consumers also seem to be feeling less optimistic, with retail sales showing less-than-stellar numbers in December. China’s strict zero-Covid policy has forced many major cities to go back into lockdown since the last few months. This has contributed significantly to the decline in retail sales.

What’s Next for China?

Following China’s interest rate cuts, Chinese stocks rose, with the benchmark CSI 300 Index up as much as 0.9% after falling in the previous two days.

Beijing has made economic stability a priority this year. A meeting is scheduled to take place in the fall, where President Xi Jinping is expected to be confirmed as the leader again. This suggests that the government will take more steps to spur growth this year.

Moreover, policymakers have stepped up the issuance of bonds used by local governments to fund infrastructure. They’ve also told banks to accelerate lending to property companies, as this will help stabilize the housing market.

There’s no denying China is trying to move in the right direction in 2022, but it’s hard to predict how the rest of the year will pan out.

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