China’s surprise cut in key policy rates this week highlights a dilemma facing Beijing as authorities try to revive an economy awash with cash in the financial system but still lacking in consumer demand.
Monday’s 10 basis point cuts in the People’s Bank of China’s (PBOC) seven-day and one-year lending rates isn’t much of a spur for banks to boost lending — they already lend to each other at much lower rates — and analysts say more fundamental measures are needed to revive confidence in an economy ravaged by a property crisis and ongoing COVID-19 lockdowns.
The PBOC is facing the challenge of a “partial liquidity trap,” says Alicia García Herrero, chief economist for Asia Pacific at Natixis, as interest rates are not low enough to be defined as a Japan-style liquidity trap, but “cash remains trapped in the largest banks” due to growing systemic risks.