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Old 15-08-2023, 10:49
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Default China’s Surprise Rate Cut Sparks Drop in Key Bond Yield and Yuan

The recent surprise rate cut by the People’s Bank of China (PBOC) has sent shockwaves through the Chinese market. The aim was to stimulate economic growth, but it has led to unintended consequences. The benchmark government bond yield has plummeted to a three-year low, and the yuan has weakened. This decline in bond yields and the currency indicates growing concerns about Chinese assets and the urgent need for further stimulus measures to revive growth.

The PBOC’s decision to lower one-year loan rates by 15 basis points to 2.5% caught many off guard. This announcement came just moments before the release of disappointing economic data, including weaker-than-expected retail sales and fixed-asset investment figures. These factors have exacerbated market sentiment and emphasized the necessity for additional fiscal and monetary measures to support the economy.

Experts suggest that the impact of the rate cut on growth hinges on whether the positive effects of lower rates outweigh the challenges posed by wider rate spreads between China and the US. To regain market confidence, Beijing must demonstrate a commitment to increased spending and further monetary easing, such as reducing banks’ required reserve ratio.

The yield on China’s 10-year bonds has dropped five basis points to 2.57%, reaching levels not seen since the height of the pandemic in April 2020. Concurrently, the yuan has weakened both onshore and offshore, hitting its lowest level since November. The continuous decline in Chinese stocks adds to the overall negative sentiment.

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