Surprise interest rate cuts a boost to China businesses

Surprise interest rate cuts a boost to China businesses

China’s central bank has cut the key medium-term lending facility (MLF) interest rate, indicating that it is willing to lend more support to businesses despite the threat of inflation, leading economists have said.

The central bank rate cuts are likely to lead to cuts to the market-driven benchmark lending rates, helping revive demand for corporate credit.

The People’s Bank of China (PBOC) released 400 billion yuan ($59.2 billion) in medium-term loans this week at an interest rate of 2.75%, down from the 2.85% rate that was previously in place.

Most market watchers had not expected the central bank to launch the rate cuts, with economists pointing to the risk of inflation if it did so.

Upon the unexpected rate cuts, futures contracts for China’s government bonds rose, with main contracts for 10-year, five-year and two-year government bond futures up by 0.7%, 0.52% and 0.19% respectively, according to market tracker Wind Info.

According to the China Daily website, experts said the rate cuts “will reassure the market about the central bank’s priority of growth stabilization among multiple policy goals, especially as the latest economic and financial data have underlined the necessity of strengthening macroeconomic policy support”.

The National Bureau of Statistics (NBS) said China’s recovery in consumer and investment activity has slowed, due to factors including renewed Covid-19 cases and a property market downturn.

“Retail sales grew by 2.7% year-on-year in July, down from 3.1% in June. Fixed-asset investment expanded by 5.7% in the January-July period, down from 6.1% for the January-June period, dragged by a 6.4% decline in real estate development investment,” the NBS said.

Demand for credit also slowed as China’s aggregate social financing – the total amount of financing to the real economy – was recorded at 756.1 billion yuan in July, down by 319.1 billion yuan from July 2021, the central bank reported this week.

Wen Bin, chief economist at China Minsheng Bank, said further interest rate cuts could not be ruled out, “as the PBOC's policy setting still takes domestic factors as dominant determinants”.

Wen said it is possible for the PBOC to reduce the reserve requirement ratio (RRR) in the fourth quarter to boost long-term liquidity and reduce banks’ funding costs. The RRR refers to the proportion lenders must keep in reserve.

 

Unemployment rate falls

Meanwhile, China’s overall unemployment rate fell in July 2022, although it is still higher than the same period last year, the National Bureau of Statistics has confirmed. However, the number of unemployed young people was of particular concern, a Bureau official said.

NBS spokesman Fu Linghui said the urban unemployment rate stood at 5.4% in July, down by 0.1 of a percentage point from the previous month. A total of 7.83 million new urban jobs were created between January and July, he told a news conference held by the State Council Information Office.

The urban unemployment rate among those aged 25 to 59 – the majority of the workforce – fell by 0.2 percentage points to 4.3% in July. “The rate is nearing that of the same period of last year, signifying that the overall job market is stable,” Fu said.

For rural migrant workers, the surveyed unemployment rate was 5.1% in July, down by 0.2 percentage points from June.

Fu said the downward trend “can be attributed to measures targeted at helping migrant workers find jobs and quick recovery of the economy following Covid-19 outbreaks in April”.

He added: “With an easing epidemic situation, the surveyed unemployment rate in 31 major cities was 5.6% in July, down by 0.2 percentage points from June.”

However, the unemployment rate in July for people aged 16 to 24 grew by 0.6 percentage points to 19.9%. Fu explained: “July is graduation season, and the large number of new graduates entering the job market increased the unemployment rate.

“Enterprises, especially those in the service sector that cater to many young people, were hit by domestic [Covid] outbreaks, and thus encountered difficulties and were unable to provide more job positions.”

Fu also said that urban unemployment had peaked and is expected to fall further and stabilize in the future. “The pressure on the labour market is still great, and we will continue to implement a variety of measures to stabilize employment,” he said.