During the awful Chinese October data dump, I had this to say:
One wonders if said target isn’t about to be cut, along with 2015 GDP and, possibly even reserve ratio requirements.
Yes, the data was poor, moreover it showed no evidence of any turn from easing measures too date, so it’s not really any great surprise that China cut rates late Friday. The FT says the following:
The People’s Bank of China slashed its benchmark lending rate by 0.4 percentage points, while cutting its deposit rate by 0.25 per cent. This was a departure from previous rate adjustments, in which the lending and deposit benchmarks moved symmetrically – typically in increments of 0.25 percentage points.
The PBOC also gave banks freedom to offer actual deposit rates at up to 20 per cent above the benchmark, doubling its previous 10 per cent limit.
For one-year deposits, this meant that the benchmark rate was dropped from 3 per cent to 2.75 per cent. But a 20 per cent margin above the new rate, equal to 3.3 per cent, is identical to the 10 per cent margin permitted above the previous, lower rate.
Economists were sceptical that the combined move would be sufficient to boost lending and growth.
“We think the impact [of the rate cuts] on the real economy will be very limited. Without changing banks’ cost of funds, it’s difficult for banks to lower lending rates and lend more,” said Liu Ligang, chief Greater China economist at ANZ Bank.”
…“The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks. The financing costs of smaller firms, which borrow from the shadow banking sector, will not be affected,” Mark Williams of Capital Economics said in a note.
Others say it’s about the currency, from Marc Ostwald at ADM Investor Services International via FTAlphaville:
But, as Marc Ostwald at ADM Investor Services International commented in an email, the timing of this move looks to be as much about the sharp appreciation of the Chinese currency versus the yen as the fact that China’s economy is experiencing difficulties, with both Chinese CPI and PPI remaining very benign.
That makes no sense so long as the currency is pegged to the US dollar but if you’re moving towards liberalisation of interest rates and a currency float it does. Goldman is making sense::
The PBOC cut the benchmark lending and deposit rates by 40 bp and 25 bp, respectively. Meanwhile, the deposit rate ceiling was increased to 1.2 times the benchmark deposit rate (from 1.1 previously), effective from Nov 22. The one-year benchmark lending rate will stand at 5.6% (vs 6% previously) and one-year benchmark deposit rate at 2.75% (vs 3% previously).
The change is in response to the weakness in economic growth and falling inflation. High-frequency data available to select government officials may have shown significant weakening, which was likely impacted by (1) the APEC related shutdowns, (2) weakening of underlying export growth amid mixed global activity growth and the recent appreciation of the CNY exchange rate and (3) tighter domestic liquidity conditions. Although nominal interest rates have been relatively stable, real rates have been on the rise in recent months amid lower inflation, which is effectively monetary tightening.
The effects of the cut in the benchmark lending rate are likely to be small since lending rates are not currently subject to either upper or lower limits. It may however be slightly useful to borrowers in negotiations with lenders, in our view.
The deposit rate is effectively unchanged (one-year deposit rate will range from 2.75% to 3.3% vs previously from 3% to 3.3%) because the cut in the benchmark rate is fully offset by the rise in the deposit rate ceiling (assuming commercial banks utilize nearly 100% of the upside from the benchmark rate to the ceiling. We believe they will be likely to do so given the competition for deposits). We believe the reluctance to cut the deposit rate could be because the government wishes to avoid any negative impact on household income growth.
Thus the move itself is unlikely to have a big direct impact on the economy. But the indirect effects could be meaningful because today’s move sends a very clear signal to the market on policy intention. When the government intends to loosen its macro policy stance, it typically uses a range of policy tools instead of relying on just one or two. Full RRR cuts face a higher hurdle as they have more substitutes such as targeted RRR cuts, relending and its equivalents (PSL, MLF etc.). We expect the government to step up fiscal expenditure allocation and add more pressure on local government to act to support the economy, especially via speeding up infrastructure construction. These measures were the key in the growth rebound in 2Q of this year and will likely to be supportive of growth again in the rest of the year.
This is nevertheless a positive step in interest rate liberalization, in our view.
This is the key to understanding what this is about. We’re not launching into some new credit cycle. All stimulus for the past two years has been timed to support a declining economic growth rate within structural adjustment. This is no different.
