On Tuesday, China said that it could take more steps in order to stimulate its waning economy. It unveiled the new tax cuts on loans for companies. Mr. Liu Guoqiang, the Deputy Governor of People’s Bank of China, said to reporters in Beijing that there is space for them to lower the interest rates. He also added the decision would be depending on the price conditions and economic growth. On Saturday, the central bank announced that it is waiting to see the impact of a reformed monetary policy. As a part, the People’s Bank of China on Tuesday revamped a new one-year Loan Prime Rate (LPR) of 4.25%. The LPR is slightly lower than the current benchmark of 4.35%, which has not changed over the years. LPR will be the new benchmark for bank pricing loans, which can better reflect changes in market interest rates, that some analysts describe as interest rate cuts. But this adjustment is unlikely to have a huge impact on the economy of China, which is seriously slumped.
The Senior China Economist of Capital Economics, Mr. Julian Evans-Pritchard, on Tuesday, wrote in a report that this adjustment should push banks to slightly reduce the lending rates in order to have a marginal impact on economic activity. Further, he added that this measure would only reflect the borrowing costs of new loans, not outstanding loans. He wrote in the conclusion that China’s central bank still has more work to do. After the announcement of the new policy made by the central bank, the Asian market rose on Monday. Though it did not change when the actual rate was fixed. The banks of China listed in Hong Kong have dropped, probably because this measure may affect bank lending margins. Earlier a day, the real estate developers also slightly drew back.
Mr. Liu said that the new reform is more of enhancement rather than to replace the other monetary policies of the country. He also added that it is not a one-trick pony to solve the problems. Mr. Ken Cheung Kin Tai, a chief foreign exchange strategist at Mizuho Bank in Hong Kong, wrote that the central bank’s move is a slow and steady process. Also, it could hurt banks if the policymakers make too much change. The analysts from Bank of America Merrill Lynch wrote that the news took some of the heat off and has clamored for more drastic measures. They also added that China’s economic slowdown might once again trigger government pressure to cut benchmark interest rates later this year. The People’s Bank of China will have to balance more calls for interest rate cuts in order to keep the Chinese currency stable. Some analysts say it may also want to avoid taking big headline measures that may raise concerns about the economic slowdown in the politically sensitive period approaching the upcoming 70th anniversary of the People’s Republic of China.