Jobs facing downward pressure
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CHINA cut interest rates for the third time in six months yesterday as authorities sought to boost the economy following a raft of data indicating a slowdown.
From today, the one-year lending rate will be cut by 0.25 points to 5.10 percent, while the one-year benchmark deposit rate will fall by 0.25 points to 2.25 percent, the People’s Bank of China said in a statement.
The central bank said banks would also be allowed to offer deposit rates of up to 50 percent above the benchmark, widening from the previous permitted margin of 30 percent.
Under the new terms, the ceiling on the one-year deposit rate will be 3.375 percent, compared to the previous 3.25 percent.
This is another key move for deposit interest rate reforms, paving the way for the ultimate lifting of ceiling control on deposit interest rates, the PBOC said.
The move can widen the pricing freedom of the financial institutions and improve their independent capacities in fixing prices, it added.
However, banks are not likely to offer the new ceiling rate as not many banks have used up the 30 percent margin yet, the central bank said.
“Currently, the pace of domestic economic restructuring is quickening and the fluctuation of external demand is relatively big. China’s economy is still facing relatively big downward pressure,” it said.
Liquidity in the banking system is generally adequate and market interest rates are falling, providing a good window to open up the upper limit for deposit rates, it said.
This is the third round of rate cuts by the central bank following one in November 2014 and another in March this year.
The cuts will lower funding costs to facilitate healthy development of the real economy and ensure a modest monetary environment amid the ongoing strategy of national economic restructuring, it said.
Ma Jun, chief economist with the research bureau of the PBOC, told Xinhua news agency that the interest rate cuts should not be interpreted as the Chinese version of quantitative easing (QE).
QE, adopted in some developed countries, is a set of unconventional policy measures when the policy rates are close to zero and the real economy faces recession, but this is not what is happening in China as the central bank still has many conventional tools to pump liquidity, Ma said.
China’s economy is currently facing grave downward pressure and it is necessary to cut actual interest rates and stabilize investment growth through reducing nominal interest rates.
If nominal interest rates were not cut while inflation was dropping, real interest rates will climb with risks of passive contraction in monetary conditions, Ma told the news agency.
Many economists expect more easing measures over the course of the year as the world’s second-largest economy is weighed down by a weak property market and slackening growth in manufacturing and investment.
“This is not a surprise. The consumer inflation reading for April was lower than expected and employment faces downward pressures,” Lin Hu, an economist at Guosen Securities in Beijing, told The Associated Press.
“But the effectiveness of the rate cut won’t be very big, it may (only) help stabilise expectations. Fiscal policy should be stepped up and there will be further monetary policy easing if economic data continues to underwhelm. We expect the worst could be over after the second quarter and growth may stabilize in the third or fourth quarters as the property sector recovers.”
Qu Hongbin, chief China economist of HSBC, said: “The move meets market expectations. It is a forced yet smart move amid mounting economic downward pressure and deflation risks.”
Concerning efforts to liberate interest rates, Qu said the rise in deposit ceiling rate marks the central bank’s intention to adjust economic structure while supporting growth, and full liberation can be expected within the year.
Lu Zhengwei, chief economist at the Industrial Bank, said the cut marks the transition from a prudent monetary stance to loose and will facilitate a government agenda to replace short-term local government borrowings with long term ones.
He expected the cut to be followed by regular cuts in banks’ reserve requirement or central bank lending to lower funding costs for loans longer than three months.
China’s foreign trade continued to trail in April with exports down 6.2 percent from a year earlier and imports losing 16.1 percent. Manufacturing stayed flat in April from March but services weakened.
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