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China Reduces Key Interest Rate for Second Time Amidst Property Market Decline

China’s central bank on Monday cut the main benchmark interest rate that the country’s commercial banks use in issuing one-year bank loans, the latest in a series of steps by the government to address falling apartment prices, weak consumer spending and broad debt troubles.

But the reduction, the second time in two months that the government has pushed down commercial banks’ lending rates, was smaller than expected. The modest cut was the latest sign that the government’s usual tools for addressing an economic slowdown may have lost some of their effectiveness, economists said.

“This will provide only modest support to credit growth and wider economic activity,” Capital Economics, a London research firm, said in a note.

Stocks in Hong Kong, where many of China’s biggest companies trade, fell more than 1 percent Monday, while shares in mainland China were down about 0.50 percent.

Cutting interest rates slightly makes it a little cheaper for companies and households to borrow money and to make payments on existing loans. The interest rates on most loans are reset annually, often at the start of each year, so the full effects of Monday’s action may be delayed.

The central bank, the People’s Bank of China, reduced the one-year interest rate for commercial bank loans by a tenth of a percentage point to 3.45 percent, less than expected. But it did not reduce its benchmark interest rate for commercial banks’ five-year loans, leaving it at 4.2 percent.

A survey of 35 economists by Reuters last week showed that all of them expected the central bank to reduce interest rates for five-year loans as well as one-year loans. The five-year loans are mainly used for setting the interest rates on mortgages.

Last week, the central bank lowered borrowing costs for commercial banks by 0.15 percentage points. By making a more modest cut in the lending rates, policymakers were, in effect, widening the profit margins for banks.

China’s commercial banks have lent massively in recent years to real estate developers and home buyers — the same groups that have been hit hardest by China’s housing crash.

More than 50 real estate developers have already defaulted or stopped payments on overseas bonds. Country Garden has become the country’s largest developer to run into financial difficulties in the past two weeks.

The opaque accounting of China’s state-controlled financial system has made it difficult for outsiders to discern the scale of the banks’ real estate-related losses. Wider profit margins on loans could help these banks accumulate more reserves to offset these losses.

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