China central bank cuts key interest rate to boost economy

China’s central bank cut a key interest rate and injected $33 billion into financial markets Thursday, as data showed the world’s second-largest economy was flagging.

The medium-term lending facility (MLF) rate—the interest for one-year loans to financial institutions—was lowered 10 basis points to 2.65 percent, the People’s Bank of China said in a statement.

The PBOC also said it was offering 237 billion yuan ($33 billion) of funds to banks through the medium-term lending facility, “to maintain reasonable and sufficient liquidity in the banking system”.

The bank also announced a surprise cut in a short-term interest rate this week, which analysts said reflected growing concern about the state of the economy among Chinese policymakers.

In another sign of weakness, youth unemployment rose to a record 20.8 percent in May, according to official data released on Thursday.

The MLF rate guides the benchmark lending rate for households, businesses and mortgages, which is set to be announced next week.

A lowered MLF rate reduces commercial banks’ financing costs, in turn encouraging them to lend more and potentially boosting domestic consumption.

Fading recovery

Chinese authorities announced a series of lacklustre economic indicators in recent weeks that signalled the country’s post-Covid recovery is running out of steam.

Inflation rose only 0.2 per cent on-year in May, while factory activity contracted for the second consecutive month.

Industrial production rose 3.5 per cent in May, down from 5.6 per cent a month earlier, as factories gradually returned to full capacity.

Retail sales, the main indicator of household consumption, rose by 12.7 per cent on-year in May compared with 18.4 per cent a month earlier.

And exports sank in May for the first time since February, breaking a two-month growth streak as a post-Covid rebound faded.

Beijing has kept interest rates low compared with other major economies, but the near-zero inflation highlights challenges faced by policymakers as they try to stimulate growth.

Top economist and government adviser Liu Yuanchun this month called for regulators to cut borrowing costs further to ease the financing burden of small and medium-sized private businesses.

China’s six largest state-owned commercial banks cut interest rates for savers on Thursday to boost spending, according to announcements on their websites, after being asked by the central bank.

The Chinese economy is also weighed down by a debt-laden property sector and a global economic slowdown.

“All the data points so far sent consistent signals that the economic momentum is weakening,” Zhiwei Zhang, president of Pinpoint Asset Management, said in a note on Thursday.

“We expect Beijing to ramp up transfers to local governments via an increase in the quota for special local government bonds, more lending quota for policy banks, and some direct funding from the PBoC,” Ting Lu, Chief China Economist at Nomura, said in a note earlier this week.