China Adds Stimulus With Third Interest-Rate Cut in Six Months

Beijing (May 10)  China’s central bank cut interest rates for the third time in six months as it ratchets up support for an economy grappling with a debt overhang and property slump.

The People’s Bank of China will reduce the one-year lending rate 0.25 percentage point to 5.1 percent, and cut the one-year deposit rate by the same amount to 2.25 percent, effective Monday, the central bank said on its website Sunday. In another step to free up interest rates, the central bank will also raise the limit on what banks can pay savers.

Inflation remained subdued and exports and imports both slid in April -- underscoring the economy’s struggle to match Premier Li Keqiang’s 2015 growth target of about 7 percent. With capital flowing abroad and local governments embroiled in a complex debt cleanup, economists anticipate further easing.

“The economy requires substantial stimulus to get back on its feet,” said Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc. “But monetary easing on its own may not do the trick: China also requires a fiscal kick to steady demand.”

The latest interest-rate reduction adds to China’s own steps and that of at least 30 countries that have loosened monetary policy this year as lower commodity prices give room to stimulate. It also illustrates a divergence of policy direction between the world’s two biggest economies, with analysts forecasting the U.S. Federal Reserve will lift borrowing costs later this year for the first time since 2006.

Rates Firepower

“The People’s Bank has the luxury of having plenty of room to maneuver and is willing to use it,” said Mark Williams, Chief Asia Economist at Capital Economics Ltd.

China is accelerating reforms and seeing volatile external demand, the PBOC said in a statement accompanying the decision.

The “economy faces relatively large downward pressure,” the PBOC said. “The overall inflation level is low, the real interest-rate level is above the historical average, for which there was room to use the interest-rate tool.”

Ma Jun, chief economist with the research bureau of the PBOC, said the central bank has room to use other tools such as required deposit reserve ratio and other conventional policies.

Authorities have pursued a multi-pronged easing approach this year, combining benchmark interest rate cuts with lower bank reserve ratios, liquidity injections to banks and efforts to bring down money-market rates. One area that has benefited is China’s stock market, with the Shanghai Composite Index soaring since early March, before a retreat last week.

“The PBOC wants to avoid exponential share price gains but wants to support growth, so easing after pull backs in the share market makes sense,” said Shane Oliver chief economist at AMP Capital Investors in Sydney. “It confirms that bad news on the economy will be good news for shares via monetary easing.”

Structural Reforms

In a monetary policy report released Friday, the PBOC said it will walk a fine line in its policy operations to avoid excessive easing as rising debt endangers the nation’s economic expansion.

“It is happening less as stimulus and more to offset the tightening going on via deflation in factory prices and the lowflation in consumer prices,” said George Magnus, senior independent economic adviser at UBS Group AG in London. “There’s more coming.”

One step officials have been reluctant to take is letting the yuan depreciate alongside the currencies of other emerging markets in the past year. While a cheaper exchange rate would help boost waning export competitiveness, it could also unwind long-term bets on yuan gains and spur further capital flight.

Deposit Cap

The PBOC raised the deposit-rate ceiling to 150 percent of the benchmark, further easing the financial repression that has seen savers effectively subsidize debt-fueled investment.

“This asymmetric interest rate cut is meant to lower firms’ funding costs further while leaving the deposit rate not much changed with a view to keep it attractive enough so as to avoid large deposit outflows to the stock market,” Liu Li-Gang, an analyst at Australia & New Zealand Banking Group Ltd., said by e-mail. “This also shows that the PBOC intends to speed up interest rate liberalization.”

Source: Bloomberg