Within hours of The Economist magazine calling for China’s central bank to cut interest rates to ease growing pressure on China’s slowing economy, it did and there are prospects of more to come.
The cut of 0.40% in the lending rate to 5.60% and 0.25% in the deposit rate to 2.75%, and regulatory changes to allow more competition for deposits, is both confirmation of the damage the economy’s sluggish growth is doing, and also another step in the gradual opening up of the financial system.
In particular the move is part of helping the banks and financial system, plus stressed companies in and around the property sector, room to ride out the current slow down.
Countries with strongly growing economies don’t cut rates and try and stimulate demand and ease liquidity pressures, as China has been doing for the past six months.
The Chinese economy is weak and needs help from a rate cut or two, which will take time to work, as we are seeing in Australia.
It also underlines the Reserve Bank earlier this month warning on the importance of Chinese property to the heath of the Australian economy and the future direction of interest rates.
The People’s Bank of China has been helping the financial system and corporates by lending over $US131 billion since September, on the condition the banks cut interest rates for small businesses struggling with the slowdown.
That targeted approach has clearly not been enough, so now for rate cuts to spread the easing more widely across more companies, and possibly a further cut the in next couple of months, especially if the slide in manufacturing and property continues.
"The Chinese economy is running within the proper range and positive signs have emerged in economic restructuring. However, high financing costs and obstructions still remain prominent problems for the real economy,” the central bank said in its statement on Friday night.
“Reducing high financing costs for enterprises, small and micro-firms in particular, is of great importance to stabilizing economic growth, job creation and the benefit of the people," noted the bank.
It’s been increasingly clear that the combination of very low inflation (in fact deflating producer prices for business), slowing investment and the gathering property slump, that the Chinese economy is heading for a crunch and needed a cut to official interest rates settings which were clearly too high for the state of growth and demand.
This rate cut will lower bank lending rates, most of which are at or above the benchmark lending rate.
The AMP’s chief economist Dr Shane Oliver wrote on the weekend: ”The move may be modest but it sends a signal that the PBOC is determined to support growth and also likely signals more cuts ahead as there is rarely just one rate move on its own.
"Quite clearly the PBOC now wants a lower interest rate structure in China and it will get its way.
"As such the move is positive for the Chinese growth outlook and for Chinese shares. Chinese shares rallied 4.5% one month after the last rate cut in 2012 and were up 16% six months later,” according to Dr Oliver.
Our market will start strongly today, but unless the iron ore price rebounds past $US80 a tonne very quickly, the impact of the Chinese rate cut will quickly fade.
The way oil, gold and copper jumped, then retreated in US trading on Friday night tells just how fragile confidence in the outlook for commodities is.
The catalyst for the rate cut looks like the first report on the health of Chinese manufacturing from HSBC/Markit, which showed a slowing to a reading of 50, which is neither expansion or contraction
China’s cut followed news that Japan is now in recession, growth in Europe remains stagnate, or slowing in places such as the UK and Germany.
China’s property sector, especially housing, remains the key indicator to watch (as the Reserve Bank is doing).
Home prices continue to slide, falling in October from a year earlier in 67 of the 70 biggest cities. Urban investment is falling as a result and land prices are are dropping.
The People’s Bank was quick to say Friday that the rate cut, its first since the summer of 2012, did not mean that monetary policy would change direction in a fundamental way or that more aggressive economic stimulus measures were on the way.
“Overall, the country retains a mid to high rate of macroeconomic growth, price inflation has slowed, the economic structure is continuously being optimized and upgraded and growth is shifting from being investment-driven to being driven by innovation," the central bank said in a statement.
“Thus, there is no need to undertake strong stimulus measures, and the prudent monetary policy direction will not change."
