As most countries around the world plan to raise interest rates in 2022, this country is doing the opposite and is lowering its interest rates. China introduced an interest rate cut on January 17, 2022. Yes, you read that right, the Chinese central bank has decided to lower its interest rates.

In a stark policy divergence with other major economies, the People’s Bank of China (PBOC) lowered the rate of one-year loans provided to banks by 10 basis points, the first reduction since April 2020. The PBOC lowered the interest rate on 700-billion-yuan ($110.19 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions from 2.95% to 2.85%. This follows its decision to reduce its one-year loan prime rate for mortgages in December 2021.

Official data released on January 17 showed GDP rising by 4.00% in Q4 2021 from a year earlier, the weakest since early 2020. However, economists warned the figure did not consider the effect of the latest omicron outbreaks throughout China, which materially impacted the service industry. 

This marks Beijing’s latest efforts to stimulate growth, which has been faced with challenges including various COVID outbreaks, weakening retail sales and the continued decline in property sales. 

Countries that are expected to raise interest rates in 2022: 

 Countries that raised interest rates in 2021: 

Why is China cutting its interest rate when most of the world is raising it?

1.    Less inflation concerns unlike most of the world

• China’s official consumer price index (CPI) rose by 1.50% in December 2021 from a year earlier, down from the 2.30% recorded in November 2021.

• Chinese authorities eased restrictions on coal production related to climate goals that has led to a run up in raw material prices.

• The supply of pork and vegetables recovered in December 2021 as well from disruptions caused by bad weather in October and November.

 2.    Continued effects of omicron outbreaks

• China has a zero-tolerance approach to COVID-19. Authorities lock down cities completely and curb any form of travel to prevent any widespread outbreaks when a positive case is detected.

• The rising costs of lockdowns and increasing dissatisfaction among its population are heating up.

• Continued detection of omicron cases in major cities like Beijing, Dalian and Tianjin, have led to heightened concerns over the upcoming Lunar New Year holiday travel season and the Winter Olympics scheduled in February 2022.

3.    Cooling real estate sector

• Heavy real estate lending and widespread housing speculation led to China erecting the equivalent of 140 sq ft of new housing for every urban resident in the past two decades. In fall 2021, the Chinese government introduced policies to limit speculation and minimize the risk of a real estate bubble that has made new homes unaffordable for younger families.

• As part of the Chinese government’s efforts to reduce the economy’s reliance on property development, which accounts for 20-25% of GDP, Beijing squeezed financing provided to real estate companies in 2021. This led to an 11.40% fall in the area of new real estate projects in 2021, which consequently reduced the pricing and production of construction materials like steel and cement.

• According to Bloomberg, property investment fell 14.00% in December 2021 year over year, another sign of a slowing property market.

 4.    Falling consumption levels

• With the decline in home prices in smaller cities, the value of the Chinese people’s overall assets has declined, which in turn made them less willing to spend.

• Land sales, which have traditionally been a key source of municipal revenue have fallen materially, leading to civil servants’ compensation being reduced and hiring put on hold.

• According to Goldman Sachs analysts, a 7.00% projected growth in 2022’s Chinese real household consumption would still remain below its pre-COVID trend.

Based on the factors outlined above, the interest rate cut is expected to enable more liquidity to address these concerns. Do not be surprised to see China diverging from the rest of the world in 2022 with additional rate cuts, bucking the trend of rate hikes in a post-pandemic world.