China lowers rates amid slowdown

GDP growth slows to 4% in 4th quarter

HONG KONG: China’s central bank yesterday cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks.

In a stark policy divergence with other major economies, the People’s Bank of China lowered the rate at which it provides one-year loans to banks by 10 basis points — the first reduction since April 2020.

While inflation is the dominant concern for central bankers in the United

States and Europe, China’s relatively stable prices mean policymakers have shifted to boosting growth.

Official data yesterday showed gross domestic product rose 4% last quarter from a year earlier, the weakest since early 2020. Growth was 4.9% in the third quarter.

The rate cut is part of Beijing’s efforts to put a floor under growth in a crucial year of leadership transition for the world’s second-largest economy. The biggest challenges to meeting that goal are sporadic outbreaks of the moreinfectious Omicron coronavirus variant, and continued falls in property sales reducing housing investment.

Housing sales remained low in December, while consumer spending slowed sharply as the government tightened virus controls. An outbreak of Omicron-variant virus cases in January, including in Beijing over the weekend, will further curb sentiment.

“Consumption remains the weakest link in China’s growth story at the moment and that will by and large continue for much of this year,” said Louis Kuijs, head of Asia economics at Oxford Economics.

“We think Beijing has a bottom line of around 5%. As is the case at the moment, if growth is weaker than that, they’d feel strongly motivated to pursue more policy easing.”

Economists expect more policy action from the PBoC in coming months.

Goldman Sachs Group Inc said there was a possibility the central bank will allow banks to lower the five-year loan prime rate, a reference for mortgages, on Thursday.

The one-year rate was already cut in December.

Economists at Australia & New Zealand Banking Group and BNP Paribas see the likelihood of further reductions in the reserve requirement ratio for banks.

For the full year, China’s economy expanded 8.1%, well above the government’s target of “over 6%,” due in part to the low base of growth in 2020.

Last year Beijing took advantage of that as well as strong overseas demand, to try and remake its economy: reining in large technology platform companies and trying to squeeze financing to real-estate companies to reduce the economy’s reliance on property development, which accounts for as much as 20% of GDP.

The financing squeeze led to a 11.4% fall in the area of new projects started by real-estate developers last year, dragging down production of commodities like steel and cement. Property investment dropped 14% in December from a year earlier, according to Bloomberg calculations based on full-year government figures.

“The property sector’s drag on fixed asset investment is quite stark and shocking,” said Liu Peiqian, China economist at NatWest Group Plc.

Consumption returned to growth after a historic decline in 2020, and accounted for the bulk of last year’s economic expansion, although the pace of consumer spending growth was below pre-pandemic levels. The record trade surplus of $676 billion last year accounted for about one fifth of full-year growth.

Along with the rate cut, the PBoC also injected more liquidity by offering 700 billion yuan ($110 billion) of one-year loans, exceeding the 500 billion yuan maturing, and added 100 billion yuan with seven-day reverse repos, more than the 10 billion due.

It also cut its seven-day reverse repurchase rate to 2.1% from 2.2%.

The interest rate cuts were the latest in a string of growth-supporting moves by Beijing. Policymakers have stepped up the issuance of bonds used by local governments to fund infrastructure, and told banks to accelerate lending to property companies.