China’s Central Bank Moves to Shore Up Recovery

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 central banks, which continue to raise interest rates in an effort to cool stubbornly high inflation. 

The PBOC said Tuesday it cut the interest rate on seven-day reverse repurchase operations to 1.9% from 2.0% previously, its first cut in short-term lending rates since August. The central bank also said it injected 2 billion yuan, equivalent to about $280 million, into the banking system at the new, lower rate. 

So-called repo and reverse repo transactions are key tools used by central banks, including the Fed, to manage banks’ funding needs and influence interest rates on loans to households and businesses. 

The move means other key interest rates are likely to head lower soon, possibly within days, as the PBOC typically moves its suite of policy tools in concert. The PBOC could cut the interest rate on its medium-term lending facility that funnels loans to banks when it announces its monthly decision on that facility on Thursday, economists say. Cuts to banks’ loan prime rates—the rates banks charge high-quality borrowers for mortgages and other loans—could follow next Tuesday, when a decision on them is scheduled. 

In another sign of the shift to ease policy, some of China’s largest commercial banks cut their deposit rates last week, giving them more room to lower interest rates on new loans without squeezing profits. 

Economists say Tuesday’s rate cut shows government and central-bank officials are growing increasingly concerned that China’s economic recovery is in danger of petering out. 

“Policy makers have switched to proactive easing from wait-and-see,” economists at Citi said in a note to clients Tuesday. 

China’s economy rebounded strongly in the first quarter after authorities ditched their draconian Covid-19 controls around the turn of the year. But since then the recovery has been losing steam, with factories and exports under pressure from a darkening global backdrop and consumers reluctant to step up spending to fill the gap. 

Inflation figures last week showed China is at risk of experiencing a spell of falling prices, or deflation, a sign of feeble spending. A bundle of data due Thursday on retail sales, investment and industrial production is expected to show the economic slowdown extended into May. 

PBOC Gov. Yi Gang

Economists say it isn’t clear if lowering borrowing costs will do much to rekindle China’s recovery. Weak income growth through the pandemic means households are wary of spending and taking on new loans. Consumer confidence is fragile and private-sector investment barely grew in the first quarter. 

“This is really a blunt policy tool,” said Louise Loo, lead China economist at Oxford Economics in Singapore. Making lending cheaper won’t help that much if there’s limited demand for loans, she said. 

Economists say officials may need to use more targeted policy tools to reignite consumer spending and give businesses the confidence to invest. Those could include tax cuts or subsidies for purchases of electric vehicles and other big ticket items, as well as policies aimed at reviving a moribund real-estate sector and financial support for small and midsize businesses. 

—Grace Zhu contributed to this article.

Write to Jason Douglas at [email protected]