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Economy needs more boost beyond interest rate cut
By Tao Dong |
July 10, 2012, Tuesday
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Print Edition
Print Edition
THE People's Bank of China on July 6 cut the one-year lending rate by 31 basis points (to 6 percent) and the one-year deposit rate by 25 basis points (to 3 percent). The timing of the action was a surprise, ahead of the release of June economic data.
The central bank has become more explicit about asymmetric rate cut this time. This is the second rate cut in one month, following the previous move on June 7. Until a month ago, the central bank tried to avoid taking symbolically significant moves like interest rate cuts and preferred taking more subtle action such as fine-tuning loan quota and adjusting the reserve requirement ratio.
This move is clearly a response to the weak loan growth and soft investment activities, in our view. Local press reported that the four largest banks in China lent out merely 188 billion yuan (US$29.8 billion) in June, compared to 250 billion yuan in May which was another weak number.
The Purchasing Managers' Index suggested that new orders had declined further in June, under the 50-point mark.
These happened despite the fact that the State Council and the National Development and Reform Commission took stronger efforts to stimulate the economy by accelerating the approval process for infrastructure projects, banks were encouraged to lend out and property transaction volumes started rebounding.
The feedback from the ground suggests that the stimulus package has already lost steam and the initial data indicated that the measures have failed to jump start the broad-based economy.
Will the monetary easing be effective to rescue the economy? We do not think so. In our judgment, China is in a liquidity trap. Further cuts in interest rates can hardly generate business interest.
Nowadays, it is not that funding costs are too high to do investments, but the private sector has altogether lost interest in investing in the real business due to overcapacity and surging costs.
For banks, it is the lack of quality borrowers who are still interested in receiving bank credit, instead of interest rates being too high.
Breaking up monopoly
What China needs to do is to break up the monopoly of state-owned enterprises in the services industry, where the private sector is still keen to invest. China should cut tax rates, especially in the services sector. But these are unlikely to materialize this year due to the election of the country's new leadership.
The asymmetric reduction between the lending and deposit rates has more impact on the banks. This shrinks the margins of the banks.
Unlike last time, the government seems willing not to hide its true intention this time.
Beside the policy intention, introduction of new small banks with private capital would further accelerate the process of narrowing spread. The profitability of the banking sector seems to have hit a major turning point.
We look for one more asymmetric rate cut, possibly in September or October (25-basis-point cut in the one-year lending rate), and three more cuts in the reserves requirement ratio (50-basis-point cut per quarter).
Should inflation fall more than expected, we may call for one extra rate cut.
The article was extracted from a Credit Suisse Asian Daily note dated July 6. The opinions expressed are his own.
The central bank has become more explicit about asymmetric rate cut this time. This is the second rate cut in one month, following the previous move on June 7. Until a month ago, the central bank tried to avoid taking symbolically significant moves like interest rate cuts and preferred taking more subtle action such as fine-tuning loan quota and adjusting the reserve requirement ratio.
This move is clearly a response to the weak loan growth and soft investment activities, in our view. Local press reported that the four largest banks in China lent out merely 188 billion yuan (US$29.8 billion) in June, compared to 250 billion yuan in May which was another weak number.
The Purchasing Managers' Index suggested that new orders had declined further in June, under the 50-point mark.
These happened despite the fact that the State Council and the National Development and Reform Commission took stronger efforts to stimulate the economy by accelerating the approval process for infrastructure projects, banks were encouraged to lend out and property transaction volumes started rebounding.
The feedback from the ground suggests that the stimulus package has already lost steam and the initial data indicated that the measures have failed to jump start the broad-based economy.
Will the monetary easing be effective to rescue the economy? We do not think so. In our judgment, China is in a liquidity trap. Further cuts in interest rates can hardly generate business interest.
Nowadays, it is not that funding costs are too high to do investments, but the private sector has altogether lost interest in investing in the real business due to overcapacity and surging costs.
For banks, it is the lack of quality borrowers who are still interested in receiving bank credit, instead of interest rates being too high.
Breaking up monopoly
What China needs to do is to break up the monopoly of state-owned enterprises in the services industry, where the private sector is still keen to invest. China should cut tax rates, especially in the services sector. But these are unlikely to materialize this year due to the election of the country's new leadership.
The asymmetric reduction between the lending and deposit rates has more impact on the banks. This shrinks the margins of the banks.
Unlike last time, the government seems willing not to hide its true intention this time.
Beside the policy intention, introduction of new small banks with private capital would further accelerate the process of narrowing spread. The profitability of the banking sector seems to have hit a major turning point.
We look for one more asymmetric rate cut, possibly in September or October (25-basis-point cut in the one-year lending rate), and three more cuts in the reserves requirement ratio (50-basis-point cut per quarter).
Should inflation fall more than expected, we may call for one extra rate cut.
The article was extracted from a Credit Suisse Asian Daily note dated July 6. The opinions expressed are his own.
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