China's Latest Key Interest Rate Cut

China's Latest Key Interest Rate Cut

almost 4 years ago2 mins

China announced a cut to a key interest rate on Monday, in an effort to start piecing its coronavirus-hit economy back together 🇨🇳

What does this mean?

To understand Monday’s announcement, it’s worth rewinding to February, when China cut a different key interest rate – one that helps determine the rate at which commercial banks lend money. Lower rates typically encourage borrowing, but they also squeeze banks’ profits by narrowing their “net interest margin” – the difference between the amount they pay in interest and the amount they charge borrowers 💴

So on Monday, China’s central bank lowered another interest rate – the one it charges the country’s banks on week-long loans – by the most in five years. It’s likely hoping the decision will reduce their costs and, in turn, encourage them to lend more to the country’s businesses and consumers.

Source: Bloomberg
Source: Bloomberg

Why should I care?

By announcing economy-boosting measures in March, China now seems to be part of a coordinated effort by global central banks to minimize the long-term economic effects of coronavirus 🌏 That may explain why some investors now expect the country to provide even more economic support, including fresh interest rate and tax cuts. And with transport systems in Wuhan – where the virus’s spread began – reportedly reopening this week after a two-month lockdown, those measures could be helpful as the region’s businesses and consumers try to return to normal.

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One way investors try to figure out when stock markets in Europe and the US might bounce back is by comparing their coronavirus statistics with those in China, which seems to have come through the worst of the pandemic 📊 But analysts have now begun to question the accuracy of Chinese data. And if the country’s not as well as it claims, investors referencing China to predict a stock market recovery as soon as next quarter might be proved overly optimistic.

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