The People’s Bank of China (PBOC) made a surprise announcement on Friday that they will lower interest rates for the first time since 2012. The move indicates a shift of strategy by Beijing as concerns mount over rising debt and weaker growth in the world’s second largest economy.
One-year benchmark lending rates will be lowered by 40 basis points to 5.6%, and one-year benchmark deposit rates will be cut by 25 basis points to 2.75%, according to the Chinese central bank. The change comes after several months of targeted measures failed to ease borrowing costs for smaller businesses.
Bank loans in China were just a bit lower than 100% of GDP in 2008, but jumped to 139% in August of 2014 – a rise of 6.7% year on year and the fastest pace of any emerging market, according to data by JPMorgan Chase. India’s bank loan to GDP ratio is only 55.6% of GDP by comparison.
Chinese economic growth slowed to 7.3% during the third quarter and some analysts fear that the pace of expansion could fall below 7%, which is a psychological level and a number not seen since the global financial crisis.
Since the last intervention in 2012, Chinese authorities have tried to maintain growth while keeping a low level of debt. A switch to broader, less targeted stimulus by the PBOC risks backfiring if lenders return to giving loans to state-owned banks instead of smaller, private companies.
“It may help local governments and state firms that borrow from banks, it may not help a great deal to firms that borrow from other parts of the financial system,” said Mark Williams, Chief Asia Economist of Capital Economics. “So the net result will be that big state-owned companies are somewhat better off.”
Asian currencies, emerging market stocks, and some commodity futures such as steel and iron ore climbed after the announcement.