China Cuts Borrowing Rates Again in Bid to Boost Recovery

Economists say that more drastic measures may be needed, with debt and uncertainty continuing to weigh on consumers’ willingness to spend

Chinese banks trimmed benchmark interest rates on loans to households and businesses, a telegraphed move that follows earlier rate cuts aimed at reigniting a fading economic recovery.

Economists say lower borrowing costs might not be the right medicine for China’s economy, however, as households and businesses have shown little appetite to borrow with debt levels already high and prospects for jobs and growth deeply uncertain.

On Friday, Chinese Premier Li Qiang said the government is studying a package of policy measures to promote sustained economic growth. “The external environment is becoming more complex and severe, and the slowdown in global trade and investment will directly affect the recovery process of our country’s economy,” Li said at a meeting of China’s cabinet, known as the State Council, according to state television.

Among the policies being considered by Beijing, The Wall Street Journal earlier reported, is the issuance of special treasury bonds worth roughly one trillion yuan, equivalent to $140 billion, to help fund new infrastructure investment, as well as looser rules to encourage people to buy more than one home in the hope of sparking a turnaround in China’s beaten-down real-estate market.

Economists say to foster a stronger recovery, the government should also consider tax cuts or other forms of financial support to help struggling small and midsize businesses, as well as vouchers or similar measures to finance household consumption.

“Rate cuts alone may not be enough,” said Serena Zhou, senior China economist at Mizuho Securities in Hong Kong.

Tuesday’s reduction in banks’ so-called loan prime rates is the final step in a rapid round of policy easing initiated by China’s central bank that points to officials’ growing unease over the health of the economy.

The one-year loan prime rate offered by banks was lowered to 3.55% from a previous rate of 3.65%, while the five-year rate—typically used to price mortgages—was cut to 4.2% from 4.3%, the People’s Bank of China said Tuesday.

Loan prime rates are set by a panel of banks and represent the terms offered to the most creditworthy borrowers for corporate loans and mortgages. The PBOC publishes loan prime rates based on averages of quotes that it receives from 18 commercial banks, including Industrial & Commercial Bank of China, Bank of China and the China arms of foreign banks such as Citigroup and Standard Chartered.

In a note to clients on Tuesday, economists at Capital Economics said the reduction will nudge down debt-servicing costs for some existing borrowers as well as the price of new loans. But they said it isn’t clear if the change will boost borrowing much, given that households and businesses seem reluctant to borrow. Sentiment is still weak, they wrote.

The change to loan prime rates comes after China’s central bank last week cut lending rates on three key tools it uses to funnel cash to commercial banks. That was the first big change to its policy settings since August, when China’s economy was still being hit by sporadic lockdowns and weak spending under the government’s zero-tolerance approach to Covid-19.

In another easing step, banks have recently been reducing the rates paid on customer deposits.

The shift to looser policy by the People’s Bank of China stands in contrast to the U.S. Federal Reserve and most other major global central banks, which continue to signal that further interest-rate increases will probably be needed to cool stubbornly high inflation.

The economic slowdown adds to a list of challenges for Beijing that also includes prickly relations with the U.S. and moves by Washington and its allies to throttle China’s access to advanced computer chips. Multinational manufacturers are rethinking China’s role in their supply chains in response to concerns over future trade disruptions from frictions with the West.