China’s central bank cuts RP rate to spur growth

The PBOC is now pressing the country’s large state-owned banks to lend more money to public housing projects and small businesses instead of low-risk government projects / PROFITEASE PHOTO

By Joel Lee

China’s central bank cut its repurchase agreement rate to the lowest level since Jan 2011 in a bid to counter the slower-than-expected growth.

The People’s Bank of China (PBOC) announced Thursday it has sold 10 billion yuan ($1.6 billion) of 14-day contracts at 3.5 percent – a further sign of monetary easing after injecting 500 billion yuan ($81 billion) into five major state-owned banks on Wednesday.

The repo rate is a gauge of funding availability in the interbank market.

Industry analysts say the combined moves are expected to rev up the sagging domestic demand; economists project the annual growth rate to fall short of its targeted 7.5 percent by as much as 0.3 percent this year.

The PBOC is now pressing the country’s large state-owned banks to lend more money to public housing projects and small businesses instead of low-risk government projects.

“The PBOC is making a heroic but schizophrenic effort to maintain momentum on financial market reforms while alleviating political pressure to support growth by using targeted interventions,” Cornell University professor Eswar Prasad told The Wall Street Journal.

In August, growth in industrial production hit a six-year low while foreign direct investment hit a four-year low. China’s property market – estimated to be a quarter of the national economy – has slumped for four straight months since May despite a glut of unfinished apartments.

Industry watchers say President Xi Jinping’s ruthless anticorruption campaign has additionally frozen consumer sentiments and investment.

Unlike the U.S. Federal Reservice, the PBOC – informally called “Big Mama” – doesn’t operate independently and has for decades ordered the banks to make “politically approved” loans, they added.

Chinese authorities have so far tried to keep an arm’s length from relying on either broad-scale fiscal stimulus or aggressive monetary easing to arrest the stagnating economy. Such drastic measures might cause a flood in lending which would weigh down on China’s astronomical debt load and expose the economy to greater risks.

Authorities have instead long pushed for longer-term financial reform to spur competition among state-owned banks and boost consumer spending.

But business owners remain still cautious as the sluggish market and lack of real demand make borrowing risky. The big banks are also reluctant to lend to small businesses due to the possibility of loans going bad.

The PBOC’s efforts are still limited as shown by the recent drop in the rate of overall credit expansion in China.

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