Investors welcome China’s rate cuts but want fiscal catalyst

China’s slashing of its key lending rates on Monday marks one of the most forceful interventions from the People’s Bank of China (PBOC) in recent years.

The one-year loan prime rate (LPR) was reduced by 25 basis points to 3.1%, and the five-year LPR, widely used as the benchmark for mortgages, fell by a similar margin to 3.6%.

For global investors, this news couldn’t come at a better time. The world’s second largest economy has been mired in sluggish growth, largely driven by a combination of property market woes, deflationary pressures and muted consumer demand.

These rate cuts signal a new level of urgency among Chinese policymakers, underscoring their commitment to reviving a growth trajectory that has been faltering for months.

For investors, this is a welcome move. Lower borrowing costs should support businesses and households, unlocking fresh liquidity and reigniting the economic momentum that has been sorely lacking.

However, while monetary easing will undoubtedly be a powerful lever, it’s increasingly clear that a more potent fiscal response – especially targeting households– will be the key to achieving the country’s year-end target of 5% GDP growth.

Ripple effect

Global markets tend to breathe a collective sigh of relief when China’s central bank moves decisively to bolster its economy.

The PBOC’s rate cuts will have a rippling effect boosting optimism among global investors, many of whom have been eyeing China’s economic headwinds with a growing sense of apprehension.

Lower rates can be expected to spur consumer spending and investment in critical sectors, creating a more favorable environment for Chinese equities and bonds.

These moves should also ease concerns over China’s struggling property market, a