China’s big move to achieve 5% growth target, two key rates cut to historic lows

In its latest move to boost its dwindling economy and address sluggish spending, China’s central bank announced a cut in two key interest rates to historic lows on Monday.  

The move to revive the world’s second-largest economy comes just within days after China posted its slowest quarterly growth in a year and a half, signalling the deep economic woes the country faces.

The one-year Loan Prime Rate (LPR) has been slashed from 3.35 per cent to 3.1 per cent.

LPR is the benchmark for the most advantageous rates lenders can offer to businesses and households.  

Meanwhile, the five-year LPR, the benchmark for mortgage loans, was cut from 3.85 per cent to 3.6 per cent.

Both these rates were last reduced in July and are at all-time lows.

China targets annual growth of 5%

For China, leaders are targeting annual growth of five per cent this year, but this goal is seen unachievable due to sluggish demand, poor consumption and a prolonged as well as debilitating debt crisis in the colossal property sector.

However, Beijing said it has “full confidence” in achieving its annual growth goal, but economists say more direct fiscal stimulus is needed to revive activity and restore business confidence.

China’s weakening economy

On Friday, data showed China’s economy grew 4.6 per cent in the third quarter, its slowest rate in a year and a half.

Authorities acknowledged a “complicated and severe external environment… as well as new problems of domestic economic development”.

The disappointing data came after weeks of announcements and news conferences about an eagerly awaited stimulus plan, though investors say they are still waiting to see more details.

To boost spending, top banks in China on Friday cut slashed rates on yuan deposits for the second time this year.  

Central bank chief Pan Gongsheng on Friday said authorities were considering a further cut to the amount commercial lenders must hold in reserve before the end of the year.

Is China heading into deflation?

Months of sluggish spending has raised fears that China will dip back into deflation after it ended a months-long stretch of falling prices early this year.

Monday’s rate cut was “an encouraging sign”, AFP quoted Zhang Zhiwei, President and Chief Economist of Pinpoint Asset Management, as saying.  

“The monetary policy has clearly shifted to a more supportive stance since the press conference on September 24. The real interest rate in China is too high,” Zhang Zhiwei further said.

With inputs from AFP.