China reduces basic interest rate on loans for one year

China’s central bank lowered its base interest rate for loans on Monday, leaving the five-year loan rate unchanged.

According to CNBC, these decisions weakened expectations of a stronger intervention than monetary policy after a set of data pointed to the stalled growth momentum in the world’s second-largest economy.

The People’s Bank of China cut its one-year loan base rate – linked to most household and corporate loans in China – by 10 basis points from 3.55% to 3.45%, less than the 15 basis points expected by the majority of economists in a Reuters poll. This was the second time China had cut that rate in three months.

The People’s Bank of China (PBOC) left the five-year loan base rate – linked to most mortgages – unchanged at 4.2%, while economists expected a 15-basis point cut.

Economists’ expectations for default risks came from worsening liquidity problems in the country’s real estate sector, especially after Country Garden was announced to be on the brink of default, while China’s Evergrande Real Estate last week filed for bankruptcy protection in Manhattan court.

“Hopes for an incentive-led shift in economic activity depend largely on the prospect of increased financial support,” he added.

Monday’s action follows the sudden cuts in short- and medium-term lending rates last Tuesday following a set of economic data indicating weak credit growth and emerging downturn risks, adding to fears that the economy is slowing at a rapid pace.