China Central Bank Cuts Interest Rates
PBOC Rate Reduction Is First in More Than Two Years in a sign that the country’s leadership is leaning toward more sweeping measures to bolster flagging economic growth.
Late Friday night is a time for surprises in China, and on this Friday, Beijing delivered.
The People’s Bank of China cut its one-year benchmark lending rate by 0.4 percentage point to 5.6%. It also trimmed the guideline deposit rates and gave Chinese banks greater flexibility in setting rates they offer to savers. The moves are in response to signs of sputtering growth, ranging from flat factory activity to weak internal demand to declines in China’s crucial property market.
Below is a guide to what this means to the world’s No. 2 economy.
What does the lending-rate cut do?
It should make it cheaper for Chinese businesses to borrow money from banks. Because the one-year loan rate is a benchmark rate, it should impact other lending rates throughout the Chinese economy. The idea is that cheaper lending rates will let Chinese businesses borrow the money they might need to hire and expand.
Will it help?
One potential problem is that there’s no guarantee that borrowers will want the credit. Many economists say businesses have little appetite for borrowing while economic growth looks soft.
The other potential problem is that it lowers lending rates for parts of the economy that already borrowed heavily in the past. Those include property developers and local governments. The PBOC has tried to use more targeted measures to spur growth, such as making moves that help small businesses and the agriculture sector, but Beijing apparently decided those weren’t enough.
What does the move with deposit rates mean?
China sets a ceiling on deposit rates, or the rates banks pay to depositors for holding their money. In effect, this keeps banks from competing against each other by offering higher deposits. It also gives banks a steady stream of cheap money that they can lend out at higher rates. For years it was pretty sweet to be a Chinese bank.
However, central bankers and lots of economists recognize the drawbacks to the system. Without competition, banks weren’t reaching out to parts of the economy, such as small businesses, that needed loans. Meanwhile, paying depositors less than they might get for their savings doesn’t help China’s efforts to nurture a middle class that will ultimately have more money to spend. Last year China eliminated a floor on lending rates and has discussed loosening deposit rates.
Friday’s move frees up banks to offer slightly higher rates to depositors if they choose. That could attract more deposits that they could then lend out. It also moves China’s banking system a bit closer toward a broader loosening of deposit rates.
Some economists say that the move is basically a wash, however, because it lowered the deposit rate even as it widened the band at which banks could set rates. That basically lets banks keep deposit rates where they are.
How bad is the Chinese economy?
The U.S. would kill for China’s growth rate. Most economists expect China’s growth this year to still top 7%. Still, that’s down from double-digit growth rates just a few years ago. China needs a fast growth rate to keep up employment as its rural population continues its migration into the cities.
What’s next?
That depends on whether economic growth slows further. The PBOC said it doesn’t see the need for more aggressive stimulus measures. We’ll see whether that changes.
(인용: Carlos Tejada, 월스트리트저널)
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Central Banks Move to Boost Global Growth
The People’s Bank of China and European Central Bank moved Friday to pump up flagging global growth, boosting stock markets but raising questions about the limitations of central-bank intervention
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Chinese Central Bank Falls Back on Trusty Rates Lever as New Tool Kit Not Enough
China’s central bank tried out a range of new tools this year that failed to reduce financing costs or reverse an economic slowdown before finally opting to cut benchmark interest rates for the first time since July 2012.
Seeking to rein in debt expansion and to regulate the burgeoning shadow banking industry, policymakers had taken targeted steps to support demand while eschewing broad monetary easing. Premier Li Keqiang said in September that China now relies on strong reforms rather than strong stimulus to bolster the economy, according to the official Xinhua news agency.
The unconventional tools lack transparency and broad-based market participation and represent “a step backwards” in China’s financial reform, according to Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong.
Today’s rate cut is good news for the economy, and “perhaps as importantly, it reflects the PBOC’s return to conventional monetary policy instruments,” Shen wrote.
Here’s a look at what the People’s Bank of China had tried with its various targeted measures:
1. SLO
China’s central bank was said to have added 50 billion yuan ($8.2 billion) into the banking system today via the short-term liquidity operations, or SLOs, Market News reported.
In January 2013, the PBOC adopted SLOs, mainly involving the use of repurchase agreements and reverse repos with maturities of fewer than seven days, as an extra tool to manage the country’s cash supply.
2. SLF
China’s central bank started the Standing Lending Facility, or SLF, in early 2013 to provide 1-month to 3-month liquidity support to banks. It required banks to provide high-rated debt and credit assets as collateral.
The PBOC said the SLF tool is its take on the Discount Window used by the Federal Reserve and the Marginal Lending Facility at European Central Bank.
The monetary authority pumped 2.365 trillion yuan in liquidity via SLFs in total in 2013, partly to address a cash crunch in the middle of that year. The total outstanding SLF at the end of 2013 was only 100 billion yuan.
In early 2014, the PBOC injected 340 billion yuan into small banks in the first quarter and by the end of the quarter, all outstanding SLFs were paid back. The PBOC did not use SLFs in the last two quarters, it said in monetary policy reports.
3. PSL
The central bank has provided little information about the Pledged Supplementary Lending tool. Around mid-year, Chinese media reported the PBOC had made a 1 trillion yuan PSL to China Development Bank for an affordable housing development.
In its third-quarter monetary policy report released this month, the PBOC said it has provided “long-term, stable funding” to shantytown development at “reasonable costs” via a PSL, without providing further details.
4. MLF
As rumors about additional central bank injections swirled in mid-September, the PBOC confirmed the moves more than a month later in its third-quarter monetary policy report.
The central bank said this month it had created the Medium-term Lending Facility, or MLF, in September and announced it had pumped 769.5 billion yuan of 3-month lending into Chinese banks -- 500 billion yuan in September and 269.5 billion yuan in October -- at a rate of 3.5 percent.
The central bank didn’t name the borrowers.
5. RRR cuts for chosen banks
The central bank cut the reserve requirement ratio twice in April and June, respectively, for designated banks to boost lending to rural and small businesses.
(인용: Xin Zhou, 부름버그)