China reacts in the trade dispute: interest rate cuts and loans

Markets in China had been waiting for economic stimulus for a long time. The country's economy has been weak for some time. There may be another reason behind the decisions now made.

China is helping its economy cope with the growing pressure from the ongoing trade dispute with the US by cutting interest rates and providing loans. As Central Bank Governor Pan Gongsheng announced in Beijing, the interest rate on the so-called minimum reserve requirement (RRR) will be reduced by 0.5 percentage points. The governor intends to use this to inject one trillion yuan (currently around €122 billion) into the capital market over the long term.

This means banks have more money at their disposal that they no longer have to hold back. They can use it to issue loans, for example. Pan explained that the global economy is currently fraught with uncertainty, with increased trade tensions disrupting global industrial and supply chains, triggering turbulence in international financial markets, and weakening the momentum of global economic growth.

The measures will take effect in the coming days. In addition, the central bank is reducing the key interest rate—an important financial instrument for implementing monetary policy—by 0.1 percentage points to 1.4 percent. Among other things, Beijing also adjusted the interest rate on home loans, cutting it by 0.25 percent.

Due to ongoing tensions in international trade and problems in the Chinese economy, markets had been waiting for economic stimulus from the government for some time. Initial indicators indicate that China's economy is beginning to suffer from the trade dispute with the United States. Sentiment in the manufacturing sector has deteriorated. Furthermore, according to media reports, significantly fewer containers are being booked from China to the United States.

In China itself, weak demand is weighing on economic performance. Consumer confidence remains weak as a result of a severe crisis in the real estate sector. In addition, unemployment is high, especially among young people. Families face high costs for childcare and education.

China's central bank therefore now plans to support elderly care and the consumption of services with a 500 billion yuan refinancing program. Two packages of 300 billion yuan each are intended to support lending to agriculture and small private enterprises, as well as to channel funds into scientific and technological innovations.