China Cuts 1yr Benchmark Rate and Doubles EV Subsidies in Its "Cash for Clunkers" Program

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Navid

July 25, 2024

AP reporting – China has taken significant steps to stimulate its slowing economy by unexpectedly cutting a key policy rate and doubling subsidies for electric vehicles (EVs) purchased to replace older cars. The People’s Bank of China reduced its one-year medium-term lending rate by 20 basis points to 2.3%, the largest cut since the COVID-19 pandemic began in 2020. Additionally, the rate on seven-day loans was lowered to 1.7%. These measures, aimed at easing financial conditions, were accompanied by major state-run banks reducing deposit rates to 1.35%, their first reduction of 2024.

Despite these efforts, economists warn that the lower deposit rates may not boost consumer spending, a critical factor for economic recovery, as savers might continue to hoard cash instead of spending. The rate cuts came after a policy-setting meeting of the ruling Communist Party, which outlined ambitious reforms but did not detail government-driven stimulus plans. This lack of specifics, combined with a property sector downturn, has led to a slowdown in China’s economic growth, which expanded at an annual rate of 4.7% in the last quarter, down from 5.3% earlier in the year.

In tandem with monetary measures, China is also enhancing subsidies for EVs and new energy-efficient appliances as part of a broader strategy to spur economic activity and reduce environmental impact. The National Development and Reform Commission announced that purchases of eligible vehicles and appliances would receive increased subsidies, encouraging consumers to upgrade to more energy-efficient products. This move is part of a larger initiative that includes significant spending on recycling programs to manage the influx of scrapped materials, aiming to stimulate demand across various sectors of the economy.

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