China Cuts Key Policy Rates to Boost Economy Amid Global Stock Downturn

China has reduced key interest rates to boost its economy, which has been struggling amidst a global stock market downturn. Major state-run banks also cut deposit rates. However, analysts suggest these measures may not lead to increased consumer spending. A major policy meeting outlined reforms but lacked concrete stimulus plans.

China ratcheted up its effort to reinvigorate its economy Thursday by cutting a key policy rate and interest paid on bank deposits.

The move coincided with a downturn in world stocks, extending losses in Chinese markets that have declined this year while share prices soared in many other countries. By midday, Hong Kong's Hang Seng was down 1.4% and the Shanghai Composite index lost 0.4%. The People's Bank of China said it cut the lending rate for one-year medium-term policy loans by 20 basis points to 2.3%. That is the biggest rate cut since China's economy was slammed by the COVID-19 pandemic in 2020.

The rate on 7-day loans was reduced to 1.7%. Major state-run banks cut deposit rates to relieve pressure on their finances, reducing the rate paid on one-year fixed deposits by 10 basis points to 1.35%, according to the official Xinhua News Agency. The cuts, involving the "Big Four" banks: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank, mark the first reduction for 2024, following three cuts last year.

Despite these measures, analysts warn that lower deposit rates might not stimulate consumer spending, which is essential to reviving economic growth. "Banks are already passing on lower deposit rates to savers, which will do nothing to encourage spending in the current environment," RaboResearch noted. Growth in the world's second-largest economy slowed to 4.7% in the last quarter, down from 5.3% in January-March. Earlier this week, the central bank cut several other lending rates, maintaining a cautious approach to economic stimulation.

The recent rate cuts followed a major policy-setting meeting of the ruling Communist Party, where ambitious reform plans were discussed, although no specific government-driven stimulus initiatives were announced.

(With inputs from agencies.)