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China Cuts Lending Rates Again, Yuan Sinks to Near 2-Year Low

Published 08/21/2022, 09:50 PM
Updated 08/21/2022, 09:56 PM

By Ambar Warrick The People’s Bank of China (PBoC) cut lending rates for a second consecutive week on Monday as it struggles to shore up economic growth amid COVID lockdowns and a brewing real estate and energy crisis. 

The bank trimmed its one-year benchmark Loan Prime Rate (LPR) to 3.65% from 3.7%, while its five-year LPR was cut to 4.3% from 4.45%, it said in a statement. It had last week slashed two other benchmark rates.

The yuan fell after the decision, dropping 0.1% to 6.8239 to the dollar- its weakest level in nearly two years. The currency has fallen steadily this year in the face of weakening economic trends. 

Chinese banks use the LPR as a benchmark for what interest rates to charge their best clients, with PBoC setting the LPR using proposed rates offered by 18 commercial banks. The one-year rate is used in new and outstanding loans, while the five-year rate influences home mortgages.

The PBoC’s cut reflects a continued dovish tilt by the central bank in the face of a sharp slowdown in economic growth this year. 

China logged a swathe of weaker-than-expected economic readings for July, implying that the economy likely shrank during the month after barely expanding through the second quarter. 

A bulk of this has been spurred by several COVID-19 lockdowns this year, under Beijing’s strict zero-COVID policy. This saw the suspension of activity in several major economic hubs, including Shanghai. 

But a brewing debt crisis in China’s massive real estate market has also raised more concerns over an economic slowdown. These concerns were exacerbated by a mortgage boycott by Chinese customers on unfinished projects.

The country now faces a severe power crunch in its Sichuan province, which has already spurred the shutdown of several factories in the region.

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