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 government measures to address falling apartment prices, weak consumer spending and widespread debt problems.
But the cut, the second time in two months that the government has pushed the lending rates of commercial banks, was smaller than expected. The modest cuts are the latest sign that the government’s usual tools for responding to an economic downturn may have lost some of their effectiveness, economists said.
“This will provide only modest support to credit growth and broader economic activity,” Capital Economics, a London research firm, said in a note.
Stocks in Hong Kong, where many of China’s biggest companies trade, fell more than 1 percent on Monday, while shares in mainland China fell about 0.50 percent.
Lowering interest rates slightly makes it a little cheaper for companies and households to borrow money and make payments on existing loans. Interest rates on most loans are reset annually, usually at the beginning of each year, so the full impact of Monday’s action could be delayed.
The central bank, the People’s Bank of China, cut the one-year interest rate for commercial bank loans by a tenth of a percentage point to 3.45 percent, lower than expected. But it did not reduce its benchmark interest rate for five-year loans by commercial banks, leaving it at 4.2 percent.
A survey of 35 economists by Reuters last week showed that all of them expected the central bank to cut interest rates for five-year loans as well as one-year loans. The five-year loan is primarily used for setting interest rates on mortgages.
Last week, the central bank lowered borrowing costs for commercial banks by 0.15 percentage points. By making more modest cuts in lending rates, policymakers are, in effect, expanding profit margins for banks.
China’s commercial banks have lent heavily in recent years to real estate developers and home buyers — the same groups hardest hit by China’s housing crash.
More than 50 real estate developers have defaulted or stopped payments on overseas bonds. Country Garden has become the country’s biggest developer to run into financial trouble in the past two weeks.
The opaque accounting of China’s state-controlled financial system has made it difficult for outsiders to determine the scale of the banks’ real estate-related losses. Wider profit margins on loans could help these banks accumulate more reserves to offset these losses.
