China surprised markets by lowering a key short-term policy rate and its benchmark lending rates on July 22, in an attempt to boost growth in the world's second-largest economy.
The cuts come after China reported weaker-than-expected second-quarter economic data last week and its top leaders met for a plenum that occurs roughly every five years.
The country is verging on deflation and faces a prolonged property crisis, surging debt and weak consumer and business sentiment. Trade tensions are also flaring, as global leaders grow increasingly wary of China's export dominance.
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The People's Bank of China (PBOC) said on July 22 it would cut the seven-day reverse repo rate to 1.7% from 1.8%, and would also improve the mechanism of open market operations. Minutes later, China cut benchmark lending rates by the same margin at the monthly fixing. The one-year loan prime rate (LPR) was lowered to 3.35% from 3.45% previously, while the five-year LPR was reduced to 3.85% from 3.95%.
“PBOC starts to implement pro-growth policy, consistent with the message out of the plenum — authorities are committed to reach whole year GDP target, and policies will adjust after the disappointing Q2 GDP,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, adding that rising expectations for the Federal Reserve to start cutting interest rates also gave the PBOC room to manoeuvre its monetary easing.
China's yuan eased after the rate cuts, and Chinese bond yields fell across the board after the rate cut announcement.
“The fact that PBOC didn’t wait for the Fed to cut first indicates that the government recognises the downward pressure on China’s economy,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management. He expects more rate reduction in China after the Fed enters its rate cut cycle.
China's rate cut is aimed at "strengthening counter-cyclical adjustments to better support the real economy," the PBOC said in a statement.
The announcement also comes after the PBOC said it would revamp its monetary policy transmission channel. PBOC Governor Pan Gongsheng said last month the seven-day reverse repo serves the function of the main policy rate.
