HONG KONG – China’s central bank unexpectedly cut regulated bank lending rates by nearly a third of a percentage point on Thursday evening, and made a rule change that could further reduce borrowing rates for companies with good credit by an additional three-fifths of a percentage point.
The double-barreled move comes just four weeks after a similar rate reduction and rule change by the People’s Bank of China, and underlines the growing worries in Beijing about what the government has begun to describe as a sharp economic slowdown.
Much like top Federal Reserve officials receive advance warning of economic statistics in the United States, Chinese policy makers have almost certainly received at least a rough preview of second-quarter economic statistics due for release next week. Most economists now expect those figures to show considerably weaker-than-usual growth, at least compared with China’s vigorous expansion over most of the last three decades.
Surveys of business executives in recent weeks have shown low expectations for overall manufacturing activity, along with concern about slackening orders and mounting inventories of unsold goods. Many property developers are facing cash shortages as real estate prices have fallen by as much as 20 percent in the last year, although the latest official data in the last week has suggested that prices may finally be leveling off or even ticking up slightly.
Coal prices have been falling for the last nine straight weeks, as demand for electricity has slowed from its usual double-digit pace. The quantity of coal stored at major Chinese ports is at record levels. Huge piles of unsold coal now line roads in the coal-mining districts as mine owners maintain production but have been leery of selling at depressed prices.
The People’s Bank of China reduced the regulated rate for one-year bank loans by 0.31 percentage points, to 6 percent.
At the same time, the central bank also said that banks would be allowed to charge as little as 70 percent of the regulated interest rate to good customers; the previous minimum, set a month ago, had been 80 percent. And until the initial rule change early last month, banks had been required to charge at least 90 percent of the regulated rate, even to their best customers.
On Thursday, the central bank also lowered the regulated minimum interest rate that banks must pay depositors. But the reduction in deposit rates was smaller, a quarter of a percentage point.
The smaller change in deposit rates is the latest sign that Chinese banks have found themselves lately in the unfamiliar position of struggling to persuade Chinese households and companies to deposit more money. A variety of trusts and other investment vehicles have become popular in China as savers have begun to rebel at very low regulated deposit rates, which will fall to a minimum of 3 percent for one-year certificates of deposit with the changes announced on Thursday evening.
China’s central bank provided no explanation for its moves, which take effect on Friday morning. But the initial reaction of private sector economists was that the rate cuts represented a signal of genuine worry by Chinese decision makers
“This aggressive policy action reflects, in our view, a deepening concern by policy makers that the economy has yet to find a bottom and requires additional stimulative monetary settings to engineer a recovery,” Nick Chamie, an economist at RBC Dominion Securities, wrote in a research note.
The interest rate reduction coincides with an emerging consensus that inflation, widely seen in China as the paramount danger to the economy last summer and perhaps even a threat to social stability, no longer poses much of a challenge. While annual inflation at the consumer level peaked at 6.5 percent at the consumer level last July, it has decelerated so sharply since then as the economy has slowed that it reached just 3 percent in May; the consensus forecast of economists is that when the government announces on Monday the inflation rate for June, it will show just 2.3 percent.
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