The Chinese central bank lowers the main interest rate on bank lending

Stocks fell in China and the currency fell on Monday after the country’s central bank announced a smaller-than-expected cut in its key interest rate.

Many investors and economists had expected Beijing to act more decisively on interest rates as China grapples with falling apartment prices, weak consumer spending and widespread debt problems.

The central bank, the People’s Bank of China, cut just a tenth of a percentage point from the benchmark one-year interest rate used for most corporate loans, with no change whatsoever to the five-year rate used to price mortgages. The slight reduction in loans for a year marks the second time in two months that the government has cut commercial banks’ lending rates.

Economists said the modest size of Monday’s cut was the latest sign that the government’s usual tools for tackling an economic slowdown may have lost some of their effectiveness.

“This will provide only modest support to credit growth and broader economic activity,” Capital Economics, a London research firm, said in a note.

International investment banks were quick to reduce their forecasts for the growth of the Chinese economy, which Beijing aims to achieve this year by “about 5 percent.” UBS announced on Monday, shortly before the rate cut, that it would lower its growth forecasts to 4.8% this year and 4.2% next year. Japan’s Nomura is more gloomy, predicting last Friday that growth will be 4.6 percent this year while maintaining his forecast for next year at 3.9 percent.

The CSI 300 index of large Chinese companies traded in Shanghai and Shenzhen fell 1.4 percent on Monday, while the Hang Seng Index in Hong Kong, which also includes many large Chinese companies, fell 1.8 percent, to its lowest level since November. The Hang Seng Index has fallen for seven consecutive sessions and fell more than 12 percent in August.

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The renminbi closed weaker than 7.3 per dollar on Monday in Shanghai trading, a level the Chinese government tried to maintain last November, when the currency was at its weakest level since 2007. It fell further on Monday in Hong Kong, where trading is less tightly controlled. It took more than 7,335 RMB to buy 1 dollar by mid-afternoon there.

The authorities in Beijing use the country’s cash reserves and state-controlled banks to buy and sell currencies to limit movements in the value of the renminbi against the dollar.

The renminbi suddenly rebounded slightly in the last minutes of trading in Shanghai and Hong Kong. The Chinese government has a long history of intervening in the currency markets at the end of trading sessions to prevent closing prices from showing sharp changes.

As a result, many investors view the daily movements of the renminbi, also known as the yuan, as a true measure of its value.

“Intraday trading shows you which direction the market wants the yuan to go, and the closing is likely to show the government’s action,” said Diana Chuileva, chief economist at Enodo Economics in London.

Monday’s rate cut was meant to make it a little cheaper for businesses and households to borrow money and make existing loan payments. But the full impact of the cut may be delayed because interest rates on most loans reset annually, often at the beginning of each year.

The central bank, in consultation with state-controlled commercial banks, lowered the benchmark one-year interest rate on corporate loans to 3.45 percent from 3.55 percent. The benchmark interest rate for five-year loans remained at 4.2%.

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A Reuters survey last week of 35 economists showed that all of them expected the central bank to cut interest rates on five-year loans as well as one-year loans.

Last week, the central bank cut borrowing costs for commercial banks by 0.15 percentage points. By making a more modest cut in the one-year lending rate and leaving the five-year rate unchanged, policymakers were, in effect, widening profit margins for the banks.

Chinese commercial banks have lent heavily in recent years to property developers and homebuyers – the same groups hit hard by China’s housing collapse.

More than 50 real estate developers have already defaulted or stopped paying offshore bonds. Country Garden has become the nation’s largest developer in financial difficulty, with about $200 billion in unpaid bills.

The opaque accounting of China’s state-controlled financial system has made it difficult for outsiders to discern the scale of banks’ losses related to real estate. Wider profit margins on loans could help banks build up more reserves to offset these losses.

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