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China lowers key interest rates to boost slowing economy

China lowers key interest rates to boost slowing economy

China has cut its benchmark interest rates for the first time since 2015, hoping to stimulate its flagging economy amid the pandemic and trade tensions with the US.

The People’s Bank of China (PBOC) announced on Monday that it would lower the one-year loan prime rate (LPR) from 3.85% to 3.8%, and the five-year LPR from 4.65% to 4.6%. The LPRs are used to set corporate loans and home mortgages.

The move signals that China is concerned about its economic recovery, which has been losing momentum in recent months. The country’s gross domestic product (GDP) grew by 4.9% in the third quarter, down from 7.9% in the second quarter and 18.3% in the first quarter.

Analysts said that the rate cut was a modest but necessary step to ease the financial burden on businesses and households, especially as China faces power shortages, supply chain disruptions, property market woes and rising inflation.

"The rate cut is a welcome move, but it is not a game changer," said Louis Kuijs, head of Asia economics at Oxford Economics. "It will help to lower borrowing costs slightly, but it will not address the underlying structural issues that are holding back China’s growth potential."

Kuijs added that China needs to implement more fiscal stimulus, such as increasing public spending and tax cuts, to support domestic demand and investment. He also said that China should ease its regulatory crackdown on sectors such as technology, education and entertainment, which has dampened investor confidence and consumer sentiment.

Some experts said that the rate cut could also be seen as a gesture of goodwill ahead of a virtual meeting between Chinese President Xi Jinping and US President Joe Biden on Tuesday. The two leaders are expected to discuss a range of issues, including trade, climate change, human rights and regional security.

"The timing of the rate cut is interesting," said Iris Pang, chief economist for Greater China at ING. "It could be a signal that China is willing to cooperate with the US on some fronts, such as climate change, by showing that it is taking measures to boost its green economy."

Pang said that lower interest rates could encourage more lending for green projects, such as renewable energy, electric vehicles and carbon capture. She also said that lower rates could help ease the pressure on China’s property sector, which accounts for about a quarter of its GDP.

China’s property market has been rocked by the debt crisis of Evergrande, one of the country’s largest developers, which has defaulted on some of its bond payments and faces billions of dollars in liabilities. The troubles of Evergrande have raised fears of a broader contagion in the sector, which could have spillover effects on the financial system and the real economy.

"The rate cut could help to stabilize the property market and prevent a hard landing," Pang said. "But it is not enough to solve the fundamental problem of excessive leverage and overcapacity in the industry."

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