China’s Biggest Banks Cut Interest Rates to Boost Economy and Tackle Debt Crisis

Five of China’s biggest banks have announced interest rate cuts, as the country looks to boost its faltering economy. These rate cuts are expected to pave the way for further reductions in lending rates. In addition to this, Chinese authorities have also decreased the amount of funds institutions need to hold in foreign exchange reserves. This comes as China faces a slowdown that has had a significant impact on global markets. The focus is now on troubled developer Country Garden’s spiraling debt crisis, as it contributes to roughly a quarter of China’s economy. Country Garden has delayed a deadline for creditors to vote on whether to postpone payments for a private bond. This vote is crucial for Country Garden to avoid default. The company’s ability to extend its domestic debt will determine its ability to service external bondholders. The stress in the property market has intensified the pressure on Beijing to implement supporting measures and has raised concerns about the ability of policymakers to revive China’s broader economic growth. China’s new home prices fell for the fourth month in August. In an effort to slow the pace of yuan declines, the central bank has announced a cut in the foreign exchange reserve requirement ratio. Major state banks are also preparing to lower interest rates on existing mortgages. Furthermore, two major Chinese cities, Guangzhou and Shenzhen, have eased mortgage curbs, broadening the definition for home buyers to enjoy preferential loans. Property stocks rallied on the back of these measures, with China’s CSI 300 Real Estate Index increasing by 2.4% in afternoon trade. The deposit rate cuts are expected to offset the pressures on banks’ narrowing net interest margins. Lower deposit rates will have a significant impact on profitability, as around three-quarters of Chinese banks’ liabilities are deposits. As per a banking analyst at Moody’s, the impact of the deposit rate cut is material. China’s mortgage loans currently total 38.6 trillion yuan ($5.29 trillion) as of June, accounting for 17% of banks’ total loan books.