China lowered one-year and five-year loan prime rates (LPR) by ten basis points, the first such easing in 10 months as authorities seek to shore up a slowing economic recovery. The move was smaller than most expected, prompting the yuan to dip toward a seven-month low. The yuan also slipped against the euro on persistent concerns about the real estate sector.
The yuan is trading around 6.8740 per euro, down 0.2%. Gains in oil prices and the dollar offset the decline in the yuan. The greenback was trading near a six-month high against the euro as investors viewed it as an alternative to higher-risk assets in the wake of hawkish comments by Federal Reserve Chairman Jerome Powell, which spurred a recent rally in the greenback.
Investors remained concerned that Beijing’s efforts to shore up the economy would hurt growth and corporate profitability. The central bank’s decision to cut deposit and lending rates could help reduce some financial stress on businesses as households spend less. China is facing weakening consumer and producer prices, a slowdown in business investment, and growing defaults by property developers.
The Industrial and Commercial Bank of China lowered its five-year deposit rate by 25 basis points to 2.5 percent to stimulate spending. The lender also lowers its three-year rate by 25 basis points to 2.45 percent. The moves are designed to give consumers a reason to spend money instead of saving it, a key objective of Chinese policymakers.
Other signs of a weakening economy include rising debt levels in the country’s credit system. Data released on Tuesday showed that the ratio of household debt to disposable income was at a record high of 167%, and corporate leverage was also at a new high.
While the central bank’s decision to cut rates may have a short-term impact, the broader yuan weakness will likely persist. Citi analysts say that China’s authorities tolerate a “gradual” currency weakening, which can benefit exporters by making the yuan cheaper. The yuan’s decline since March has been driven by unwinding bullish positions and capital outflows, as well as worries that tightening zero-Covid restrictions will hurt economic growth.
The yuan was also lower against the Swedish crown, trading at its lowest level against the euro since 2009 on persistent concerns about the real estate sector. Sweden’s government is trying to curb speculation in the property market, but it has so far struggled. The country’s banks are borrowing at record-low rates to maintain liquidity. It’s also facing a slowing economy as last year’s oil price crash continues to bite. The government plans to boost its budget for next year to reverse the trend.
