July 06th, 2012 | Caijing PBoC Cut Rate Again: It’s All About Growth
Get ready for more easing measures including RRR cuts and fiscal spending in the coming months. We still expect these measures to filter through to lift China’s growth to around 8.5% in the coming quarters.
Surprising the market, Beijing announced a second rates cut in its easing cycle. The cut was asymmetric (31bp on lending and 25bp on deposit rates). Beijing is stepping up easing to hold up growth. By cutting the lending rate more aggressively than the deposit rate, and allowing a higher discount (30% vs. 20% previously), against benchmark lending rates, the authority is trying to lift private sector’s investment demand. Get ready for more easing measures including RRR cuts and fiscal spending. Once these measures filter through, China’s growth should recover to around 8.5% in the coming quarters.
Surprising the market, including us, the People’s Bank of China (PBoC) today announced its decision to cut its 1-year lending and 1-year deposit rates by 31bp and 25bp respectively, to 6.00% and 3.00% respectively, effective from 6 July. This is China’s second rate cut in the current easing cycle and less than one month after the first cut that was delivered on 7 June.
Meanwhile, the PBoC also announced that it will further reduce the lower band of lending rate to 0.7x of the benchmark lending rate (from 0.8x previously). But this is not applicable for mortgage rates, as the central bank reiterated the property tightening measures will stay in place.
Beijing is stepping up easing to hold up growth. This is the key message from today’s rate cut. There are two surprises from today’s announcement, which implies the following:
1)The timing is earlier than expected, even if we already pencilled-in one more cut in 3Q. This may foreshadow worse than expected growth numbers that are due to release next week;
2)More importantly, the larger cut of lending rate (31bp) and the higher discount (30%) than banks can offer underlines Beijing’s intention to lower the enterprises’ borrowing cost and lift private sector’s investment demand.
It is all about growth. The latest moderation of PMI readings still suggests ongoing slowdown of demand, especially weaker external orders. Industrial profits still shrunk. And more worryingly, the job market started to slacken with employment comments in both official and HSBC manufacturing PMI dipping to below 50. This calls for more decisive easing measures.
Fortunately, inflation is falling faster than expected, which is no longer a concern for policy makers. Both the price components with PMI and higher frequency price indicators suggest that inflation is falling faster than expected. June’s CPI is likely to fall from 3% in May to below 2.5% – the lowest level since 1Q 2010; while PPI’s deflation is likely to be intensified thanks to the softening commodities prices amidst lacklustre demand. This downward trend gives Beijing sufficient room for stepping up easing.
Going forward, easing measures will be mainly focused on the three fronts (For further details, see China Inside Out: Plenty of ammunition left, published on 27 June):
-Quantitative easing via liquidity injection in open market operation and anther 200bp RRR cuts (the next one is still likely to be delivered in the coming days). Though the chance for further interest rate cut is still open should inflation falls faster than expected.
-Fiscal measures including more tax breaks and faster spending on public housing, infrastructure and social welfare.
-Concrete measures to lift private investment by opening up more sectors. Multi ministries have been issued guidelines on their respective sectors. And the more aggressive lending rate cut is a boost to private investors.
That said, property tightening measures will stay in place, as Beijing intends to avoid a significant rebound in property prices, which may fuel an uninvited real-estate bubble.
We remain confident that all these easing measures should filter through to generate a modest growth recovery to around 8.5% y-o-y in the coming quarters. Our forecast of 8.4% full year GDP growth remains intact.
Bottom line: Beijing is stepping up easing to hold up growth. The more aggressive cut on lending rates aims at lifting private sector’s investment demand. Get ready for more easing measures including RRR cuts and fiscal spending in the coming months. We still expect these measures to filter through to lift China’s growth to around 8.5% in the coming quarters.
QU Hongbin -Co-head of Asian Economics Research
SUN Junwei – China Economist