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China Cuts Key Interest Rate to Support Economy

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China’s central bank on Monday cut a key interest rate in an attempt to counter the post-COVID growth slowdown in the world’s second-largest economy.

The one-year loan prime rate, which serves as a benchmark for corporate loans, was reduced from 3.55% to 3.45%, the People’s Bank of China said in a statement, while the five-year LPR, which is used to price mortgages, was held at 4.2%.

Closely followed by the markets, the two rates are now at historic lows, after previous reductions in June.

The decision is intended to encourage commercial banks to grant more loans and at more advantageous rates. 

Monday’s measures, which run counter to rising interest rates around the world as other major economies work to curb inflation, will indirectly support economic activity as China’s growth flags.

The long-awaited, post-COVID recovery following the lifting of health restrictions at the end of 2022 has run out of steam in recent months. 

To reinvigorate the economy, the central bank reduced the rate for its medium-term lending facility (MLF) to financial institutions last Tuesday.

And financial regulators agreed Friday on the need for “financial support,” while avoiding “risks and hidden dangers,” state media reported. 

Stock markets appeared unimpressed with the move, with Hong Kong down 1.4% and Shanghai off 0.60%. 

The central bank’s decision comes as a crisis faced by property giant Country Garden, long deemed financially sound and now ultra-indebted, raise fears of a bankruptcy that could have dire consequences for the domestic financial system. 

Country Garden’s problems are building just two years after the implosion of its competitor, Evergrande.

In addition to the real estate woes, growth is also hampered by sluggish consumption amid uncertainty in the labor market and a global economic slowdown.

The negative developments are weighing on demand for Chinese goods, slowing the activity of thousands of factories.

China suspended the monthly publication of its detailed youth unemployment figures last Tuesday, after a record high of 21.3% in June, according to official data. 

In China, the unemployment rate is calculated for urban areas only and therefore provides only a partial picture of the situation. 

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