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China Cuts Benchmark Rates for Second Time in Month

July 05, 2012

China Cuts Benchmark Interest Rates for Second Time in Month

A pedestrian walks past the People's Bank of China in Beijing. Photographer: Nelson Ching/Bloomberg

China cut benchmark interest rates for the second time in a month and allowed banks to offer bigger discounts on their borrowing costs, stepping up efforts to reverse a slowdown in the world’s second-biggest economy.

The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective tomorrow, the People’s Bank of China said on its website today. The discount banks can offer on loans was widened to 30 percent from 20 percent, according to the statement.

China is moving more aggressively to promote growth as Europe’s turmoil crimps exports and domestic property restrictions curb the housing market. Today’s cuts coincided with decisions by the European Central Bank and Bank of England to increase monetary stimulus and preceded government data next week that may show expansion decelerated for a sixth quarter.

“Although most people were expecting further cuts, very few were expecting the second one to come so soon,” said Mark Williams, Asia economist at Capital Economics Ltd. in London. One possible reason for today’s action is that “policy makers have had an early look at the June data and didn’t like what they saw, suggesting the economy is weaker than they previously thought.”

Asset Purchases

China announced the interest-rate move at the same time as the BOE raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds, restarting its expansion of stimulus. Forty-five minutes later, the ECB cut its benchmark interest rate by a quarter percentage point to 0.75 percent and lowered its deposit rate to zero from 0.25 percent.

Oil and copper rose following China’s action, then retreated after the ECB disappointed investors anticipating a more aggressive effort to fight the debt crisis.

Another potential reason for China’s move is that government officials wanted to “get more bang for their buck by coordinating their action with the ECB,” Williams said.

Citigroup Inc. economists forecast the central bank will cut interest rates one more time by the end of the year and make two more reductions to banks’ reserve requirements. China has yet to build on three reductions in the reserve ratio that began in November.

The PBOC signaled the government isn’t relaxing restrictions on the property market. “All financial institutions must continue to strictly implement a differentiated housing credit policy to continue curbing property buying for speculation and investment purposes,” the central bank said in its interest-rate statement.

Lending Rate

The benchmark one-year lending rate will be 6 percent and deposit rate 3 percent after today’s cuts. The central bank reduced longer-term deposit rates by as much as 40 basis points, while other lending maturities were lowered by 25 basis points, according to economists including Bank of America Corp.’s Lu Ting. The floor on lending was widened to 20 percent from 10 percent when interest rates were cut in June.

Officials in China moved after two June manufacturing indexes fell and before a report on second-quarter gross domestic product, due to be released on July 13. The government will say July 9 that consumer prices rose 2.3 percent in June from a year earlier, a 29-month low, according to the median forecast of economists in a Bloomberg News survey. It would be the fifth straight month below the 2012 target of 4 percent set by Premier Wen Jiabao in March.

The PBOC cut both benchmark lending and deposit rates by 0.25 percentage point on June 7, the first reduction since 2008. Authorities also allowed banks to offer higher rates on deposits. The central bank said on June 29 it will keep fine-tuning policy even as economic growth was within a “targeted zone.”

Slower Expansion

The economy expanded 8.1 percent in the first quarter of 2012 from a year earlier, the least in almost three years. Bank of America estimated growth slid to around 7.5 percent in the second quarter while Credit Agricole CIB projected a drop to as low as 7 percent.

The government reduced its official target this year for economic growth to 7.5 percent from 8 percent.

The ruling Communist Party is preparing for a once-a-decade leadership transition later this year, which probably puts more pressure on officials to prevent growth from slowing too much, said Nathan Sheets, former head of the U.S. Federal Reserve’s international-finance division.

“In a year of leadership transition, I think it’s just absolutely unacceptable to them to see a significant slowing,” Sheets, now Citigroup’s global head of international economics in New York, said in a Bloomberg Television interview.

Nike Effects

Companies from Nike Inc. (NKE:US) to McDonald’s Corp. and Caterpillar Inc. are feeling the effects of a Chinese slowdown. Nike has said it has too much inventory in the nation.

Anhui Conch Cement Co., China’s biggest maker of the construction material, said last month that first-half profit may fall by more than 50 percent, and Procter & Gamble Co., the world’s biggest consumer goods company, has reported a slowdown in the Asian nation.

Credit Suisse Group AG has reduced its estimate for China’s economic expansion this year to 7.7 percent, which would be the slowest pace in 13 years, on weakness in exports, investment and corporate profits. Deutsche Bank AG lowered its forecast to 7.9 percent. The predictions compare with 9.2 percent growth last year.

In efforts to support the economy, the National Development and Reform Commission is speeding approvals for investment projects, the Ministry of Commerce announced incentives for purchases of energy-efficient household appliances and the banking regulator delayed tightening lenders’ capital requirements.

Narrower Margin

Today’s decision will narrow banks’ interest-rate margin. Institutions that offer the maximum discount on borrowing costs and the ceiling on deposits would have a margin of 0.9 percentage point, down from 1.47 points before the decision.

“In the short-term, it’s negative to bank stocks,” said Liu Li-Gang, Hong Kong-based head of Greater China economics at Australia & New Zealand Banking Group Ltd. “To enterprises, it’s very positive. But my concern is whether banks are willing to offer the 30 percent discount to enterprises as their margins already begin to narrow. If the big banks aren’t willing to do so, small ones won’t do that, either.”

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. posted the slowest earnings growth in more than two years in the first quarter. Bank of China Ltd. said profit growth decelerated to 10 percent, compared with 28 percent in the year-earlier period.

Share Decline

ICBC’s A-shares have dropped 5.7 percent since the June 7 rate cut and Bank of China has declined 6.3 percent compared with a 4 percent fall in the benchmark Shanghai Composite Index.

Even with the narrower margin, lower borrowing costs may stimulate demand, which would help the economy, said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong.

“The quick succession of rate cuts points to rising concerns that the government’s growth target of 7.5 percent for the year may be at risk,” said Ramin Toloui, Pacific Investment Management Co.’s co-head of emerging markets portfolio management in Singapore.

“While these actions provide a cushion, do not count on a robust bounce,” because the economy and financial industry are “still digesting the large investments made in recent years,” Toloui said.

--Zhou Xin. With assistance from Kevin Hamlin and Zheng Lifei in Beijing, Helen Sun in Shanghai and Scarlet Fu in New York. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Zhou Xin in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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