WebSify
Follow us on
Mail
Print

China wields the hatchet on rates, CRR

Source : SIFY
Last Updated: Thu, Nov 27, 2008 07:05 hrs
china

China on Wednesday announced a major reduction in its benchmark interest rates and banks' credit reserve ratio in an effort to counter the slump in growth, brought about by a deceleration in exports, among other things.

The People's Bank of China (PBOC), the country's central bank, slashed one-year lending and deposit rates by 1.08 percentage points, to 5.58% and 2.52%, respectively.

China experiencing a 'growth shock': World Bank

The cut in the benchmark lending rate is the fourth since mid-September and the largest in 11 years. PBOChad cut the rate by 1.44 percentage points in October 1997, at the height of the Asian financial crisis.

The key deposit rate has been cut thrice since mid-September.

Simultaneously, PBOC reduced the required reserve ratio (RRR) for major banks by 100 basis points to 15.5%, and the ratio for small and medium financial institutions by 200 basis points.

China ‘repeating US mistakes of 1930s’

Jing Ulrich, JP Morgan's chairman of China equities, described the central bank's move as "the most aggressive monetary easing in recent years."

"To support economic growth and to maintain employment, China's policymakers are complementing an aggressive fiscal stimulus agenda with monetary easing, as well as direct market intervention," Ulrich noted. "Today's easing of monetary policy will help boost liquidity in the market as the economic downturn gathers pace."

Images: Amazing Audi R8

UBS economist Wang Tao said the market had been expecting a rate cut for a few weeks now, "but the 108 basis points cut is more than expected, and demonstrates clearly that the central bank does not want to take any chances with monetary easing."

More India business stories

By moving ahead of market expectation, the PBOC appeared to be aiming to achieve the maximum effect on boosting market confidence, she added.

Nevertheless, said Ulrich, the degree of benefit realised from China's monetary stimulus will hinge on whether banks increase their lending to the most troubled sectors of the economy. "In recent months, Chinese banks have been wary of the risks associated with lending to small and medium enterprises (SMEs), export-oriented manufacturers and property developers," she added.

The large rate cut should significantly lower the corporate sector's borrowing cost, and the lower deposit rates will likely discourage household savings in favour of consumption, said Tao. "Although the deposit rate is lower than the headline year-on-year CPI (consumer price index) inflation of 4%, we think real interest rate measured against inflation expectation is now significantly positive. Month-on-month CPI inflation has already turned negative and China would be facing deflationary pressure in the coming months."

More India business stories

Ulrich expects PBOC to continue loosening money supply to improve access to financing for the corporate sector and provide funding for the $586 billion economic stimulus package that Beijing unveiled earlier this month in response to a sharp decline in GDP growth.

Tao expects the one-year deposit rate to drop further to 1.98% by end-June, 2009.

Under license from www.3dsyndication.com




blog comments powered by Disqus
most popular on facebook
talking point on sify finance