Problems of the Chinese economy. China's main interest rate is at an all-time low

The annual interest rate in China, which serves as a benchmark for corporate loans, was lowered from 3,65% to 3,55%, while the five-year rate, which is used for mortgage prices, was reduced from 4,3% to 4,2%.

Problems of the Chinese economy

The Central Bank of China lowered two benchmark interest rates in an effort to counter a slowdown in growth in the world's second-largest economy. Last week, the People's Bank of China (PBoC) cut two other key interest rates and pumped billions into financial markets as new data showed the economy was still struggling.

The policy easing is the most significant so far from leaders attempting to revive growth after recent indicators showed that the expected strong recovery was wearing off after years of Covid-19 lockdowns.

China pumps in billions

China's efforts are in contrast  with the actions of the United States and other Western countries that have been forced into a series of interest rate increases while reducing the money supply to curb inflation.

Last Thursday, officials lowered the Medium Term Loan Rate (MLF) - the interest rate on one-year loans to financial institutions by 10 basis points to 2,65%.

The PBoC also said it was offering 237 billion yuan ($33 billion) to banks through a medium-term lending facility "to maintain reasonable and sufficient liquidity in the banking system."

Unemployment in China is getting worse and worse

China has released a slew of poor economic indicators in recent weeks, leading to more calls for stimulus measures.

Youth unemployment rose to a record 20,8% in May, while exports fell for the first time since February.

Leading economist and government adviser Liu Yuanchun called on regulators this month to further reduce the cost of borrowing to ease the financial burden on small and medium-sized private businesses.

The reports from the last few days said that  Beijing is preparing a series of measures aimed at many areas of the economy, especially the real estate sector, which accounts for a huge part of the gross domestic product.

China's six largest state-owned commercial banks cut interest rates for savers this month to boost spending, according to announcements on their websites, at the request of the central bank.

Will a rate cut help?

But lowering interest rates alone is unlikely to cause a sharp rise in household or corporate debt and spending.

In the short term, the most effective way for officials to increase demand is to get government entities to spend more. At the same time, with no easy solution on the horizon, the housing market weakness and its negative impact on the rest of the economy is likely to continue.

China's indebted real estate sector, a key driver of the country's economy, is struggling to recover from a record slump after authorities restricted the industry's access to credit in 2020. To revitalize the struggling sector, the government has taken a more conciliatory approach since November, with targeted support measures for the best financially positioned developers.

VIDEO: REAL ESTATE BUBBLE IN CHINA