In an attempt to spur development in the second-largest economy in the world, China shocked markets on Monday by cutting both its benchmark lending rates and a crucial short-term policy rate.
The reductions follow China's release of second-quarter GDP data that was lower than anticipated last week, as the country's senior officials convened for a plenum, which takes place about every five years.
The nation is on the verge of deflation due to a protracted real estate crisis, rising debt, and sour attitude among consumers and businesses. Additionally, trade tensions are rising as world leaders become more cautious about China's hegemony in exports.
"The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for 'achieving this year's growth target' by the third plenum," said Larry Hu, chief China economist at Macquarie.
The People's Bank of China (PBOC) said on Monday that it will enhance the open market operations mechanism and lower the seven-day reverse repo rate from 1.8% to 1.7%.
China lowered benchmark lending rates at the monthly fixing a few minutes later by the same amount. The five-year loan prime rate (LPR) dropped from 3.95% to 3.85%, while the one-year LPR dropped from 3.45% to 3.35%.
Given the strain the yuan has been under due to a big yield gap with the dollar, Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said that rising expectations for the Federal Reserve to start decreasing interest rates also allowed the PBOC flexibility to soften its policies.
Unnamed sources close to the People's Bank of China (PBOC) were reported by the official Xinhua news agency as stating that the "decisive" rate drop demonstrated the PBOC's resolve to support the recovery and was a reaction to the plenum's goals of meeting this year's growth objective.
The PBOC also announced changes to its lending programme, stating that as of July, the collateral requirements for loans issued through its medium-term lending facility will be decreased.
According to experts, this would allow banks to sell or trade more and retain fewer longer-term bonds for collateral requirements, which would benefit the central bank in its efforts to stabilise longer-term rates, control the bond market bubble, and create a steeper yield curve.
China's yuan fell to a nearly two-week low of 7.2750 per dollar after the rate cuts before somewhat recovering.
The rates on Chinese sovereign bonds decreased throughout the curve, dropping as much as 3 basis points for the 10-year and 30-year bonds before levelling out at 2.45% and 2.24%, respectively.
Early on Monday, China's 30-year Treasury futures for delivery in September 2024 saw a 0.3% increase.
According to Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, "the government recognises the downward pressure on China's economy" because the PBOC didn't wait for the Fed to cut first.
After the Fed starts its cycle of rate cuts, he anticipates additional rate reductions in China.
According to a statement from the PBOC, China's rate reductions are intended to "strengthen counter-cyclical adjustments to better support the real economy."
The PBOC said that it will redesign its conduit for transmitting monetary policy before to this statement. The seven-day reverse repo essentially fulfils the role of the main policy rate, according to PBOC Governor Pan Gongsheng's statement from last month.
According to the source, "this is also a reflection of the improvement of the market-oriented interest rate mechanism," Xinhua said.
(Source:www.apnews.com)
The reductions follow China's release of second-quarter GDP data that was lower than anticipated last week, as the country's senior officials convened for a plenum, which takes place about every five years.
The nation is on the verge of deflation due to a protracted real estate crisis, rising debt, and sour attitude among consumers and businesses. Additionally, trade tensions are rising as world leaders become more cautious about China's hegemony in exports.
"The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for 'achieving this year's growth target' by the third plenum," said Larry Hu, chief China economist at Macquarie.
The People's Bank of China (PBOC) said on Monday that it will enhance the open market operations mechanism and lower the seven-day reverse repo rate from 1.8% to 1.7%.
China lowered benchmark lending rates at the monthly fixing a few minutes later by the same amount. The five-year loan prime rate (LPR) dropped from 3.95% to 3.85%, while the one-year LPR dropped from 3.45% to 3.35%.
Given the strain the yuan has been under due to a big yield gap with the dollar, Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said that rising expectations for the Federal Reserve to start decreasing interest rates also allowed the PBOC flexibility to soften its policies.
Unnamed sources close to the People's Bank of China (PBOC) were reported by the official Xinhua news agency as stating that the "decisive" rate drop demonstrated the PBOC's resolve to support the recovery and was a reaction to the plenum's goals of meeting this year's growth objective.
The PBOC also announced changes to its lending programme, stating that as of July, the collateral requirements for loans issued through its medium-term lending facility will be decreased.
According to experts, this would allow banks to sell or trade more and retain fewer longer-term bonds for collateral requirements, which would benefit the central bank in its efforts to stabilise longer-term rates, control the bond market bubble, and create a steeper yield curve.
China's yuan fell to a nearly two-week low of 7.2750 per dollar after the rate cuts before somewhat recovering.
The rates on Chinese sovereign bonds decreased throughout the curve, dropping as much as 3 basis points for the 10-year and 30-year bonds before levelling out at 2.45% and 2.24%, respectively.
Early on Monday, China's 30-year Treasury futures for delivery in September 2024 saw a 0.3% increase.
According to Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, "the government recognises the downward pressure on China's economy" because the PBOC didn't wait for the Fed to cut first.
After the Fed starts its cycle of rate cuts, he anticipates additional rate reductions in China.
According to a statement from the PBOC, China's rate reductions are intended to "strengthen counter-cyclical adjustments to better support the real economy."
The PBOC said that it will redesign its conduit for transmitting monetary policy before to this statement. The seven-day reverse repo essentially fulfils the role of the main policy rate, according to PBOC Governor Pan Gongsheng's statement from last month.
According to the source, "this is also a reflection of the improvement of the market-oriented interest rate mechanism," Xinhua said.
(Source:www.apnews.com)
