Chinese stocks took a dive on Monday following the announcement from China’s central bank regarding interest rate adjustments. This move, which fell short of expectations, has dampened hopes of economic stimulus for the world’s second-largest economy.
The People’s Bank of China decided to reduce its one-year loan prime rate (LPR) by 0.1 percentage point, bringing it to 3.45%. However, the five-year rate remained unchanged at 4.2%. Economists had anticipated a cut of 0.15 percentage point for both rates.
In response to this underwhelming announcement, analysts at Capital Economics expressed their skepticism regarding the PBOC’s inclination to implement more significant rate cuts that would potentially stimulate credit demand. They emphasized that the prospect of greater fiscal support is crucial for any hopes of a stimulus-led recovery in economic activity.
It is worth noting that the five-year loan prime rate is the reference rate for mortgages in China. Thus, the absence of a rate cut disappointed investors who were counting on a boost to the real estate sector. Notably, Country Garden Holdings, one of China’s largest property developers, is currently grappling with a severe liquidity crisis.
Consequently, both Hong Kong’s Hang Seng Index and mainland markets experienced declines, with the former falling by 1.8% on Monday. In contrast, Japan’s Nikkei 225 saw a modest gain of 0.4% during mixed Asian trading.
This disappointing outcome raises concerns about China’s ability to restore its economic growth to pre-pandemic levels. UBS economists, led by Tao Wang, revised their 2023 growth forecast for China’s gross domestic product downward from 5.2% to 4.8%.