China’s PBOC Seen Cutting Interest Rates Again, Just Not Yet

29 Jun 2015 | Author: | No comments yet »

China cuts rates to ease volatility.

Take heart investors, more help from China’s central bank is on the way, according to economists surveyed by Bloomberg News. AFTER the biggest two-week plunge in China’s stock market since December 1996, People’s Bank of China (PBOC) governor Zhou Xiaochuan cut interest rates to a record low.After the benchmark Shanghai Composite Index opened as much as 3 per cent higher, it fluctuated wildly before dropping as much as 3.8 per cent at the end of the morning’s trading session.

The move is reminiscent of a strategy pursued by former US Federal Reserve chairman Alan Greenspan, who lowered rates after market meltdowns in what became known as the “Greenspan Put”. Thirteen expect rates will be held steady in the third quarter, while the median estimate is for a required reserve ratio of 17.5 percent by year end. Economists weigh in with their views on the unusual move (Comments edited for style and clarity): The jumbo easing was the first such move since December 22, 2008 at the peak of the global financial crisis. In addition to the interest rates cuts, the PBoC has also reduced the amount of cash banks must keep in reserve three times, as well as using other measures to inject liquidity into the market.

The rate cut and the securities regulator’s comments that margin trading at brokerages were “controllable” failed to ease concern that speculators are unwinding their positions. “Investors have been factoring in the easing for a while, and now that the central bank actually has done the easing, it’s done,” said Li Miaoxian, a Beijing-based analyst at BOCOM International Holdings Co. One trigger that prompted the stock sell off on Thursday and Friday was the PBOC’s addition of funds to the banking system on June 25 via reverse-repurchase agreements, a step interpreted as reducing the odds of near-term monetary stimulus.

Two-year contracts that exchange the one-year deposit rate for a fixed payment were 2.03 percent late Monday in Shanghai, according to data compiled by Bloomberg, in line with the current 2 percent. Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, thinks the PBOC is done cutting rates this year, shifting the onus in the stimulus stakes. “There is more room for fiscal policy to play a larger role,” according to Shen.

Required reserve ratios for some lenders also will be reduced. “The rate cut following recent turmoil in China’s equity market gives the impression that Chinese officials are engineering a put, trying to support flagging investor confidence,” said Frederic Neumann, co-head of Asian economic research at HSBC. Not only does the move support the very weak real economy and guard against deflation risk, it also helps prevent a collapse of the stock market after a curb in margin financing. She’s looking for one or two more half percentage point reductions to banks’ reserve ratios in the second half, depending on liquidity conditions. Meanwhile, the PBOC will continue to implement targeted easing measures to improve the transmission of monetary policy, including guiding market rates lower via liquidity management tools and increasing direct lending to policy banks, Chang said.

Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. The cuts reflect Beijing’s possible growth concerns as the economy’s recovery momentum is not firm enough to ensure reaching the government’s growth target of about 7% for all of this year. Coupled with liquidity injections via open market operations and the Medium Term Lending Facility earlier last week, they suggest that China’s monetary policy will remain accommodative.

Compared to our expectation, the absence of an announcement on deposit interest rate liberalization suggests the PBOC may ultimately separate it from interest rate cut decisions, especially at a critical point before the yuan bidding to enter the Special Drawing Rights.

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