‘Too Little, Too Late’ China Rate Cut Spurs Call for More Moves

  • PBOC-backed newspaper cites analyst saying more action needed
  • Analysts see potential RRR trim, rate cut and more relending

China’s surprise interest-rate cut has done little to allay concern over the property and Covid Zero-led slowdown, with economists and state media calling for additional stimulus.

In a front-page report Tuesday, the central-bank backed Financial News said Beijing should introduce new pro-growth policies at the appropriate time to keep growth within a reasonable range, citing Wen Bin, chief economist at China Minsheng Bank. The Securities Times said in a separate report the People’s Bank of China’s surprise rate cut may be the first in a series of policies to stabilize growth.

China Central Bank Bucks the Trend Again

PBOC unexpectedly cuts interest rates

Nomura Holdings Inc.’s Lu Ting, who described Monday’s 10-basis point reduction as “too little, too late,” says even a likely cut next week in the loan prime rate, the de facto benchmark lending rate, won’t do much to boost credit demand. Economists from Standard Chartered Plc to UBS AG now see a greater chance of policy support in coming months, including more interest rate cuts, a pickup in the PBOC’s re-lending program and a further fiscal push.

“Given the lingering Covid restrictions and fragile economic recovery, we expect the government to continue increasing policy support in the rest of 2022,” Wang Tao, UBS’s chief China economist, said in a note. “The path of economic recovery in the second half will be bumpy and uncertain, depending on Covid and related policies, developments in the property market, and strength of external growth.”

Traders are betting that the next easing move could come as soon as Monday, with a reduction in banks’ loan prime rates. Interest-rate swaps on the nation’s one-year LPR declined after the PBOC’s surprise move on Monday, with the curve now implying a cut of about 10 basis points from the current 3.7% level, according to Xing Zhaopeng, a senior strategist at Australian & New Zealand Banking Group Ltd.

Unlike many advanced economies right now, China’s core inflation — which excludes volatile energy and food prices — is pretty tame, slowing to 0.8% in July as domestic demand remained weak. That gives the PBOC room to take action to fulfill its objectives, which include maintaining a stable currency, supporting growth and preventing financial risks.

At the same time, the central bank has been cautious about being too aggressive with easing, which could damage the economy in the long term given its already elevated debt levels.

Here’s a rundown of what policy action to watch out for:

PBOC Rates

Some analysts see the PBOC’s surprise move raising the possibility of more interest rate cuts in coming months while inflation and currency depreciation concerns are not as urgent. Bloomberg Economics expects a cut in the medium-term lending facility rate again in the fourth quarter. Standard Chartered Plc’s Ding Shuang also forecasts more easing, predicting a 10-point cut to policy interest rates by the end of October. However, others like Nomura’s Lu, say the room for further reductions is limited due to the narrowing profit margin for banks and the tightening monetary policy in the US and elsewhere.

Lending Rates

Banks are likely to trim loan prime rates on Monday. The LPRs are based on interest rates that 18 banks offer their best customers and are provided as a spread over the PBOC’s one-year policy rate.

Zheshang Securities’ economist Li Chao forecasts a 10 basis-point decline in the one-year LPR and a 25 basis-point fall in the five-year LPR, a reference for long-term loans including mortgages. Lenders last reduced the five-year rate by a record 15 basis points in May.


More economists are expecting the PBOC to lower the reserve requirement ratio, or the amount of cash banks must put in reserve, to help reduce lenders’ funding costs. Unlike policy loans, liquidity from a RRR cut will come at no cost to banks. Ping An Securities forecasts the PBOC may cut the RRR by 25-50 basis points between September and December to replace maturing MLF funds, while Shenwan Hongyuan Group’s Qin Tai sees a 50 basis-point cut between September and November for the same reason.

Structural Tools

The PBOC has placed a greater focus since 2020 on structural tools aimed at helping targeted sectors of the economy, such as small businesses, and it may continue to step up that effort. Ping An Securities says the PBOC could expand the relending program and reduce the interest rate for those funds to help banks provide more loans.

Fiscal Policy

Many economists expect fiscal policy to play a greater role in boosting the economy in the rest of this year, since Covid restrictions and the property slowdown have blunted the effect of monetary stimulus. The government could bring forward next year’s special local government bond quota to this year, use leftover special bond quota from previous years, and relax the financing rules for local government financing vehicles modestly, according to Wang of UBS. That’ll help underpin infrastructure investment growth of 10%-12% in the second half of the year, she said in a note.

Property Support

Some large Chinese developers surged in the stock and bond markets Tuesday following a report that regulators plan to have state-owned firms guarantee the sale of new onshore notes. Several stressed developers were notified at closed-door meetings early last week that regulators plan to provide liquidity support via new yuan bonds guaranteed and underwritten by state-owned firms, REDD reported, citing unidentified people.

Source: Bloomberg

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