Surprise interest rate cut highlights Beijing’s political dilemma

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The surprise cut in China’s main interest rates, this Monday, highlights the dilemma faced by Beijing, as governments try to implement measures aimed at relaunching the growth of the Chinese economy and financial system, while facing a shortage of resources. demand from consumers, according to analysts consulted by the Reuters agency.

The People’s Bank of China (PBOC) cut medium-term interest rates, which allow for one-year loans, by ten basis points to 2.75%, the first cut since January.
The new levels are not favorable for banks to monetize the loans they already make to each other at very low rates.

In this sense, experts warn of the need to implement measures to reinvigorate an economy that has been affected by the housing crisis and the effects of the covid-19 pandemic.

Currently, the PBOC faces the challenge of a partial liquidity trap, warns Alicia Garcia Herrero, quoted by Reuters. Chief Economist for Asia Pacific of Natixis considers that the Chinese capital needs measures that encourage sustained economic growth, namely injections of liquidity into smaller banks to finance small businesses.

However, other analysts see a priority for China to opt for expansionary monetary policies to boost the economy. At stake are more lenient measures related to the coronavirus pandemic and the public rescue of bankrupt companies.

Rocky Fan, an economics analyst at Guolian Securities, says that the housing market crisis has proved to be a drag on general confidence, as citizens do not want to buy homes in unstable market conditions and face boycotts to pay mortgages for unfinished homes.

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