China rate cuts usher in next stimulus stage
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add dropped words in fourth paragraph.
By Chan Ka Sing
HONG KONG, July 22 (Reuters Breakingviews) -For investors pondering how China's Third Plenum could revive the economy, the central bank has set the tone for what's to come. On Monday morning, the People's Bank of China unexpectedly cut key lending rates, underscoring Beijing's urgency to speed up reforms. More policies from other government ministries will follow.
China watchers were still poring over the 22,000-character policy document released on Sunday summarising last week's closed-door conclave of Communist Party leaders when the PBOC announced it will reduce the seven-day reverse repurchase rate by 10 basis points. Minutes later it also lowered the one-year and five-year loan prime rates by the same amount. The move, which the bank says is aimed at better supporting the "real economy", caught markets by surprise: the PBOC has spent the past few months guiding bond yields higher and managing the currency's volatility; Governor Pan Gongsheng has repeatedly played down expectations of aggressive easing. Most analysts had expected the PBOC to wait for the U.S. Federal Reserve to move first to soften the impact on the yuan.
On paper, a 10-basis point cut to long-term and short-term rates looks modest. Yet it does signal Beijing is serious about picking up the pace of reforms in the world's second-largest economy, where growth slowed to a worse-than-expected 4.7% in the second quarter. Moreover, Pan hinted last month that the bank would shift to short-term rate targets as the new benchmark. Its latest action on the seven-day reverse repo essentially marks a simplification of interest rates.
Last week's Third Plenum had instilled a sense of urgency among Chinese officials to boost economic growth. Indeed, the reform tasks unveiled have a 2029 deadline, coinciding with the 80th anniversary of the founding of the People's Republic and sooner than the 2035 deadline set by Beijing's 2021 five-year plan. That means other ministries will likely follow the PBOC's lead to push out new policies. That could include tax reforms that would give local governments more fiscal income, and further measures to reverse a slump in home sales and property prices.
Regardless, China's policymakers will be feeling the pressure to put their money where their mouths are.
CONTEXT NEWS
The People’s Bank of China on July 22 unexpectedly cut a key short-term policy rate and its existing benchmark lending rates.
The seven-day reverse repo rate was lowered to 1.7% from 1.8%, while the one-year loan prime rate was lowered to 3.35% from 3.45% and the five-year LPR was reduced to 3.85% from 3.95%.
The rate cut is aimed at "strengthening counter-cyclical adjustments to better support the real economy," the PBOC said in a statement.
PBOC Governor Pan Gongsheng said on June 18 the central bank is considering shifting to a short-term rate to guide markets, and the 7-day reverse repo “basically fulfils the function” of a policy benchmark.
Separately, Chinese leaders concluded a key meeting, known as the Third Plenum, on July 18, and laid out their broad economic policy goals.
Graphic: China has unexpectedly cut loan prime rates https://reut.rs/3SihGrF
Editing by Robyn Mak and Aditya Srivastav
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