China Lowers Interest Rate

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China Lowers Interest Rate

China Lowers Interest Rate To Support Economy

In order to support the faltering economy, China made a surprise decision to lower the short-term policy rate along with its lending rates.

This decision was made on Monday and is expected to boost China's already struggling economy. Since the last few years, the 2nd largest economy in the world has not been able to generate stellar growth due to slower demand in overseas and local markets.

China Faces Deflation &Amp;Amp; Weak Demand

Through actions such as lowering the rate, China wants to rectify the situation. The timing of the rate cut is also important, as it was done after the release of weaker-than-expected Q2 data from China. Following the release of Q2 data, a plenum meeting was called to make important decisions, such as the rate cut.

Some of the major problems faced by the Chinese economy include the property crisis, deflation, rising debt, and weak demand (local & overseas). Amidst all of this, trade tensions are also rising, which would reach new levels if Trump becomes the next president of the USA.

According to the PBoC, the reverse repo rate was lowered from 1.8% to 1.7%, a change of -0.1%. Additionally, the central bank made commitments to improve the operations of the open market.

Another big change from the PBoC was a cut to the lending rates for the short term. After the change, the 1-year LPR is lowered from 3.45% to around 3.335% while the 5-year LPR is lowered to 3.85%.

The Public Bank of China also made changes to its lending program and has lowered the collateral requirements for medium-term loans.

According to analysts, these actions from the PBoC will be beneficial for the industries and especially the property sector. However, when we look at the scale of the problems faced by the Chinese economy, these actions from PBoC are nowhere near enough.

After the rate cuts by PBoC, the Chinese Yuan turned lower and was last seen trading near 7.2750 against the USD. This level is a 2-week low for the Chinese Yuan and shows that the move was not received well by the FX market.

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