China cuts loan rate less than expected as calls grow to stimulate economy

China’s banks have taken investors by surprise by making a smaller than expected cut to one of its interest rates and left unchanged a key rate that guides mortgages. The People’s Bank of China (PBOC), the country’s central bank, said on Monday that the five-year loan prime rate was unchanged at 4.2 per cent while the one-year loan prime rate was cut by 10 basis points (0.1 of a percentage point) to 3.45 per cent.

Most analysts expected both rates to be reduced by 15 basis points following a surprise cut to one of the central bank’s key lending rates last week. A panel of Chinese banks sets interest rates for personal and commercial loans and mortgages but they usually follow changes to the central bank’s rates.

Chinese authorities have promised more support for financial markets in recent weeks amid a succession of disappointing economic figures. Last week the official statistics bureau suspended publication of the youth unemployment rate, which has been above 20 per cent in recent months.

Manufacturing activity has slowed, foreign investment has fallen and a two-year downturn in the housing market shows no sign of ending. After a brief flurry of spending following the lifting of zero Covid restrictions at the end of last year, businesses and consumers are showing little appetite to take on more debt.

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The authorities have promised in recent days to support the private sector and the People’s Daily on Monday published a commentary stressing the central role of private enterprise in the Chinese economy. But the government has so far resisted calls for major stimulus measures amid fears that if it hands out money to individuals and businesses they will save it rather than spend it.

The central bank and financial regulators told banks last week to boost lending in support of the economic recovery and the PBOC has signalled changes to make it easier to obtain a home mortgage. But with house prices falling it is unclear if easier access to home loans would have a significant impact on the market.

China’s property crisis began two years ago when giant developer Evergrande defaulted on some of its loan repayments. This followed the imposition of caps on debt-to-cash, debt-to-assets and debt-to-equity ratios for property developers in an effort to curb a borrowing spree that was fuelling speculation.

Country Garden, China’s largest private developer, was unable to pay the interest on some of its bonds this month and shadow banking giant Zhongrong missed payments to some customers. China’s huge shadow banking sector has played an important role in channelling funds to property developers and the housing downturn has left it exposed.

The Chinese business daily Caixin reported this week that the central bank is planning to allow local governments to refinance their huge debt with cheap loans on long maturities. Local government financial vehicles piled up debt to fund huge housing and infrastructure projects which have ground to a halt because of the property crisis.