China's central bank cuts interest rates unexpectedly, highlighting its determination to stabilise the economy

China's central bank has unexpectedly cut a number of policy rates in an effort to boost the slowing economy. Analysts believe that the surprise interest rate cut highlights the high-level determination to stabilize the economy, if the United States opens the interest rate cut cycle, China's interest rate has further room to reduce.

China's central bank announced in a statement on Monday (July 22) that in order to further strengthen counter-cyclical adjustment and increase financial support for the real economy, the interest rate of seven-day reverse repurchase operations in the open market will be reduced from 1.8% to 1.7%.

The central bank pumps money into the market by buying bonds through reverse repo operations. It was the first cut to the key short-term policy rate since August last year, according to Bloomberg data.

Subsequently, the central bank announced a 10 basis point reduction in the loan market quotation rate (LPR). That brought the one-year LPR, the benchmark by which banks offer their best rates to businesses and households, down to 3.35% from 3.45%; More than five years of LPR from 3.95% to 3.85%, is expected to drive mortgage rates further lower.

In the afternoon of the same day, the central bank updated the Standing Lending Facility rate (SLF), which provides short-term and medium term lending to banks, by cutting the overnight, seven-day and one-month SLF rates by 10 basis points.

Lowering the benchmark interest rate would help increase market liquidity, encourage banks to lend more, and lower corporate funding costs. Reducing the LPR over five years is conducive to reducing the interest burden of mortgage borrowers and promoting consumption.

To the surprise of the market, LPR tends to be tied to the medium-term lending Facility rate (MLF), and the latest MLF, which came out last week, was left unchanged. A Reuters poll of 36 market participants at the time found that more than 60 percent expected the one-year and five-year LPR to remain unchanged.

Zhang Zhiwei, chief economist at Pinpoint Investment Management Co., Ltd. in Shanghai, believes that the policy rate cut is a step in the right direction, and once the U.S. Federal Reserve starts the interest rate cut cycle, China will cut interest rates further. He also pointed out that the People's Bank of China cut interest rates before the U.S. rate cut, reflecting the government's acknowledgement of downward pressure on the Chinese economy.

China's second-quarter economic data, released on Monday, underperformed expectations, with gross domestic product (GDP) growth slowing to a five-quarter low of 4.7%. The Third Plenum of the 20th Central Committee of the Communist Party of China (CPC), which concluded last Thursday, stressed "unswervingly achieving the economic and social development goals for the whole year."

Fu Fangjian, an associate professor at Singapore Management University's Lee Kong Chian School of Business, told Lianhe Zaobao that the Third Plenum has made clear China's high-level determination to stabilize the economy, and the central bank's actions this week are also consistent with the goal of ensuring economic growth for the whole year.

Fu Fangjian analysis, although the interest rate cut was unexpected, the strength did not exceed expectations, which may be related to the United States interest rate policy has not been clear. "On the one hand, the central bank wants to release good news, on the other hand, it does not want to cause the real interest rate difference between China and the United States to be too large due to early interest rate cuts." If the US cuts interest rates clearly, China's monetary policy has room to ease further."

Chinese stocks had a muted reaction after the central bank cut its key policy rate. The three major A-share indexes all closed down slightly on Monday, with the Shanghai Composite Index falling 0.61 percent to 2,964.22 points, still not recovering from the 3,000 point mark.