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Rate cuts in China

In China, there are two main rates that affect households and corporations: the 1 year loan prime rate, used to price loans other than mortgages, and the 5 year loan rate, used to price mortgages. Yesterday, the PBoC took another step to revive its economy with a 25 bps #ratecut of its 5 year loan rate. The move is designed to incentivize the purchase of residential real estate for the most part, a crucial sector for the Chinese economy that continues to sink and is dragging the economy down with it. The last cut was done in June, and it affected both rates, and had little to no effect on the markets which continued to fall despite the incentives. In this case, the government only targeted the 5 year rate. The intention is to intervene the market without creating panic in the currency market. A much more profound reform might be needed to accomplish that goal.

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