China’s central bank on Monday cut the key benchmark interest rate used by the country’s commercial banks to issue one-year bank loans, the latest in a series of steps the government has taken to tackle falling apartment prices, weak consumer spending and broad debt problems.
But the cut, the second time in two months that the government has squeezed lending rates for commercial banks, was less than expected. Economists said the modest cut is the latest sign that the government’s usual tools for tackling an economic slowdown may have lost some of their effectiveness.
“This will provide only modest support to credit growth and broader economic activity,” Capital Economics, a London research firm, said in a note.
Shares in Hong Kong, where many of China’s largest companies trade, fell more than 1 percent on Monday, while shares in mainland China fell about 0.50 percent.
Slightly lowering interest rates makes it slightly cheaper for businesses and households to borrow money and make existing loan payments. Interest rates on most loans reset annually, often at the beginning of each year, so the full effects of Monday’s work may be delayed.
The central bank, the People’s Bank of China, cut the one-year interest rate on commercial bank loans by a tenth of a percentage point to 3.45 percent, lower than expected. But it did not cut the benchmark interest rate on five-year commercial bank loans, keeping it at 4.2 percent.
A Reuters survey last week of 35 economists showed that all of them expected the central bank to cut interest rates on five-year loans as well as one-year loans. Five year loans are mainly used to set interest rates on mortgages.
Last week, the central bank cut borrowing costs for commercial banks by 0.15 percentage points. By making a more modest reduction in lending rates, policymakers were, in effect, widening profit margins for the banks.
Chinese commercial banks have lent heavily in recent years to property developers and homebuyers — the same groups hit hard by China’s housing collapse.
More than 50 real estate developers have already defaulted or stopped paying offshore bonds. Country Garden has become the largest developer in the country that has been in financial difficulty in the past two weeks.
The opaque accounting of China’s state-controlled financial system has made it difficult for outsiders to discern the scale of banks’ real estate losses. Wider profit margins on loans could help these banks accumulate more reserves to offset these losses.