China cuts interest rates to help businesses as the economy slows

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On Saturday, the People's Bank of China launched a long overdue reform of money management in the world's second largest economy to support growth and jobs. Its purpose is to make it cheaper and easier for companies to borrow.

The central bank is gradually replacing its existing fixed reference rate, with a new preferential loan rate starting on Tuesday. The idea is that the new fluctuating LPR better reflect changes in market rates.

"China's new prime lending rate is a rate cut," said the Pantheon Macroeconomics Monday in a research note.

The Chinese interest rate system has long been criticized for failing to pass on lower rates to corporate sector borrowers. Chinese banks prefer to lend to state-backed companies because of the lower risk. This means that the private sector, which has been hardest hit by the economic downturn and the trade war, is generally underserved by credit.

The PBOC's one-year benchmark loan rate is 4.35% and has not changed since October 2015. The new LPR will be set on Tuesday and then on the 20th of each month. It will become the benchmark for banks in pricing new loans.

"The reform indicates that the central bank is trying to tackle a more fundamental problem: facilitating the transmission of lower rates to corporate borrowers," said Hao Zhou, chief economist for China at Commerzbank in Singapore.

Join the "Acceleration Camp"

Ken Cheung Kin Tai, chief foreign exchange strategist for Mizuho Bank in Hong Kong, described the reform as a "bold move". He added that this showed that the Chinese central bank wanted to join the global easing camp, especially after the recent disappointing economic statistics.
The news of change has energized Chinese markets. The Hang Seng Hong Kong index posted its largest increase in two months, gaining 2.2%. The Shanghai Composite Index also finished up 2.1%, its strongest gain in seven weeks.

Markets will closely monitor Tuesday to determine the scale of economic recovery, Cheung added.

Analysts said it was too early to say what would be the effectiveness of the monetary policy overhaul, but added that the PBOC had good reason not to opt for a reduction in its policy rate . This would not effectively reduce borrowing costs and could fuel the fear of slowing down.

China still suffers from the trade war and the pressure rises

"The authorities probably do not want to attract too much attention, especially at a time when the slowdown is already worse than expected," said Vincent Chan, managing director and head of China's equity strategy for Credit Suisse. Hong Kong.

In the current political climate, Beijing would be particularly cautious, he added.

"It's because maintaining stability is a key task in anticipation of the 70th anniversary of the founding of the People's Republic of China on October 1."

A global recession could happen much sooner than expected

Policymakers have already responded to the economic slowdown by taking various steps this year. The latest came on Friday, when China's main economic planning body announced initiatives to increase spending, including increasing residents' disposable income, stabilizing employment and improving the economy. 39, accelerating reforms in rural areas.

The Chinese central bank also has a rich set of policy instruments to manage the money supply. In recent years, for example, it has reduced the reserve requirement ratio, prompting banks to provide more loans.

The PBOC has not specified when the current benchmark rate will eventually be abolished, but it repeated Saturday that it wanted to merge its fixed and variable rate system.

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