China growth has been slowing down recently. Its intensifying trade war with the U.S is the main driven of the slowdown. In order to lift its economy, Chinese authorities have used both monetary and fiscal measures. China new ways to boost its economy growth is expected to be successful.
The International Monetary Fund has projected China’s growth will be at 6.2% in 2019. However, that forecast was made before the U.S –China trade war escalated.
Cheaper Bank Loans
China’s central bank, People Bank of China (PBOC), stated that overall borrowing costs in China have not declined. Meanwhile, other interest rates, that are more sensitive to market demand and supply, have moved down. The main reason for that is the implicit lower bound of bank lending rates.
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Therefore, PBOC uses medium-term lending facility (MLF) rate to adjust its monetary policy. The bank considered it as an aspect that is more aligned to supply-demand dynamics in China money market.
The one-year rate for the MLF last stood at around 3.3 %. The number is lower than the central bank’s benchmark lending rate, which is 4.35%.
Linking the new loan prime rate to the MLF is going to decrease the overall borrowing cost. This move has already brought some effects. On Tuesday, a day after the new reform implemented, the new one-year loan prime rate was set at 4.25%. The number is lower than the previous rate, 4.31%. Besides, the newly introduced five-year loan prime rate was fixed at 4.85%. That is below the five-year benchmark of 4.9%.
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Effective Monetary Policy
China has for many years tried to change the way interest rates work. The country wants to be more in line with the practices of central banks.
Thus, China maintains a so-called command economy. In other words, a centrally planned economy is used. With this system central bank dictates where interest rates for bank loans and deposits should be.
