Chinese Central Bank’s Rate Cuts, a Step Toward Economic Stabilization. The recent rate cuts by China’s central bank provide some reassurance that policymakers are addressing the ongoing economic slowdown. However, the substantial effort needed to revive the economy will have to come from fiscal policy, according to Capital Economics.

Julian Evans-Pritchard, head of China economics at Capital Economics, notes that these monetary policy adjustments follow the recent Third Plenum, where Chinese leaders expressed concern over the economic outlook and committed to providing additional short-term support. The People’s Bank of China (PBOC) aims to demonstrate its proactive stance through cuts to the 7-day reverse repo rate and the 1- and 5-year Loan Prime Rates (LPRs). Further action, such as a cut to the 1-year Medium-Term Lending Facility (MLF) rate, is likely.

“But the reality is small cuts…will make little difference to economic activity,” Evans-Pritchard emphasizes. While these incremental reductions signal the PBOC’s commitment, they are insufficient for significant monetary stimulus. For meaningful impact, substantial rate cuts are necessary, but such measures are improbable given the central bank’s goal to stabilize long-term yields and the Chinese yuan (CNY).

The context for these actions is crucial. Last week’s Third Plenum highlighted leaders’ concerns about the economic slowdown and their pledge for near-term support. The PBOC’s moves are part of this broader strategy, aimed at bolstering confidence and showing that all sectors of the government are contributing to economic stabilization efforts.

In summary, while the PBOC’s rate cuts are a positive signal, the heavy lifting to revitalize China’s economy will need to come from more robust fiscal policy measures. The PBOC’s small rate adjustments, although symbolically important, are unlikely to drive significant changes in economic activity without more substantial fiscal intervention. Chinese Central Bank’s Rate Cuts, a Step Toward Economic Stabilization.