CPR for the economy? China cuts lending rates to drive credit demand

Saddled with an economy that is growing at a snail's pace in the aftermath of a global pandemic, China on Monday slashed its lending rates to resuscitate economic growth. Reportedly, Chinese banks cut the one-year loan prime rate (LPR) from 3.7 per cent to 3.65 per cent.

Moreover, to resurrect the fortunes of the failing housing market in China, thePeople’s Bank of China (PBOC) also cut the five-year LPR, a reference for mortgages by 15 basis points to 4.3 per cent.

It is pertinent to note that LPR forms the basis on which most new and outstanding loans are paid. The rate is decided by a group of 18 banks. For a long time, it has been considered thefacto benchmark funding of China.

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Read More:China to miss its year-end 5.5 per cent economic growth target

Whenever an economy is in a downturn, the banks usually cut down the lending rates, which effectively reduces the interest rates on loans and mortgages.

Low-interest rates mean that consumers will engage in more lending activities, thereby providing a kick to the economy. Credit demand has been at an all-time low in the Chinese market due to the sudden closure of cities and towns due to Covid.

Why is China's growth story at a halt?

As reported by WION, while countries across the globe are opening up their borders and economies after braving a pandemic, Beijing is employing draconian measures to keep up with its 'zero-Covid tolerance' policy.

The strategy has been one of the primary reasons why China has lagged in its economic recovery. For months, the tough lockdown measures imposed by the Communist Party of China (CCP) led to a decrease in manufacturing as factories and offices were closed down for prolonged periods.

Read More:China's economic growth drops to 0.4 per cent amid draconian lockdown measures and severe heatwave

It hasn't helped the cause that mainland China is facing one of the most severe bouts of heatwave in recent memory. The intense heat has caused the Yangtze river to run dry while the electric grid faces the excruciating task of meeting growing power consumption demands.

Earlier this week, Goldman Sachs cut China's growth forecast by 0.3 per cent from 3.3 per cent to 3 per cent. Meanwhile, Nomura lowered its projections from 3.3 per cent to 2.8 per cent.

Read More: Dark clouds for China: Goldman Sachs and Nomura slash China's GDP outlook

The downgrade comes on the heels of the Chinese economy growing by a tiny 0.4 per cent in the quarter while the Politburo giving up on the 5.5 per cent economic growth rate prediction by the year-end.

(With inputs from agencies)

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