China steps up counter-cyclical adjustment with policy rate cuts

BEIJING - With two policy rate cuts announced on a single day, Chinese monetary authorities are making greater efforts to strengthen counter-cyclical adjustment and shore up market expectations amid post-COVID recovery, analysts said.

The People's Bank of China (PBOC), the country's central bank, lowered the seven-day reverse repo rate for the first time since last August from 2 percent to 1.9 percent on Tuesday when injecting funds into the financial system through open market operations.

Later the same day, the PBOC also announced a cut on the interest rates of its standing lending facility, with the overnight rate down by 10 basis points to 2.75 percent.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company Limited, said the reverse repo rate cut has reflected market supply and demand for funds while signaling further counter-cyclical adjustment and efforts to stabilize the market.

"As an important variable of the macroeconomy, the central bank's rate cut on open market operations would facilitate market confidence," said Wang Qing, an analyst with Golden Credit Rating, noting that the move would further propel China's economic recovery in the second half of 2023.

The cuts came ahead of the PBOC's release of the medium-term lending facility (MLF) rate and loan prime rate (LPR) decisions, which are set for Thursday and next week, respectively.

In August 2022, when the PBOC last cut the reverse repo rate by 10 basis points, the MLF rate was brought down the same day, while the LPR, a market-based benchmark lending rate, was lowered a week later.

In a circular issued late Tuesday by four state organs, including the National Development and Reform Commission, the Chinese government said it will work to lower financing costs for business entities and increase loans to small and micro firms.

China's mild inflation has also left room for policy rate adjustments, according to analysts. In the first five months of 2023, the country's consumer price index (CPI), a major gauge of inflation, edged up 0.8 percent year-on-year.

The 10-basis-point reverse repo rate cut is a quite moderate move, according to Dong, who considered it conducive to striking a balance between multiple policy targets such as maintaining price and financial stabilities, supporting the real economy, and keeping the RMB exchange rate generally stable at an adaptive, balanced level.

Prior to this week's rate cuts, China's six state-owned commercial banks had moved to cut deposit rates by around 10 to 15 basis points, which will help replenish capital and boost their abilities to support the real economy.

PBOC Governor Yi Gang, during his inspection in Shanghai earlier this month, has pledged that the central bank will continue to precisely and effectively implement a prudent monetary policy while strengthening counter-cyclical adjustment, supporting the real economy, promoting employment and maintaining currency and financial stability.

The central bank will also better utilize monetary policy tools, maintain reasonably ample liquidity and keep the amount of currency and credit at an appropriate level and a steady pace, the governor said.