Chinese shares faced another decline on Monday as banks in the country cut interest rates, albeit less than expected. The one-year loan prime rate was reduced by 0.1 percentage point to 3.45%, falling short of economists’ predictions. Notably, there was no adjustment made to the five-year equivalent, which had been widely anticipated to be lowered, and is considered a benchmark for mortgage pricing. This news further compounds the uncertainty surrounding China’s economy, which has been struggling for the past few months.
As a consequence of these developments, Hong Kong’s Hang Seng Index, which heavily comprises mainland Chinese stocks, experienced a 1.8% drop after recently entering a bear market. Correspondingly, the mainland CSI 300 Index declined by 1.4%. Furthermore, China’s currency experienced a weakening in value, with the offshore yuan trading at approximately 7.32 per U.S. dollar. This occurrence can be attributed to the increasingly negative sentiment surrounding the Chinese economy, which was exacerbated when China fell into deflation in July.
To mitigate the economic downturn, the central bank unexpectedly decreased the medium-term lending rate as an effort to inject more liquidity into the economy. This measure typically prompts Chinese banks to reduce the loan prime rate by a corresponding amount. However, doubts persist regarding China’s ability to reach its official 2023 economic growth target of around 5%. Economists at UBS have downgraded their real growth forecast for China to 4.8% this year, while Citi has lowered their target to 4.7%, underscoring concerns about the country’s economic performance.
