×

China rate cut no magic bullet for economy

_DSC5354.jpg
Zhang Peng | LightRocket | Getty Images

China's interest rate cut was a welcome surprise for markets, spurring a global stock rally on Friday, but economists caution that the move is no magic fix for the slowing economy.

"It lowers the downside risks to the economy but probably doesn't change the baseline forecast for slower growth in 2015 than in 2014," Bill Adams, senior international economist at PNC told CNBC on Monday.

After resisting calls for broad-based monetary easing, the People's Bank of China (PBoC) cut interest rates late Friday, reducing the 12-month benchmark lending rate by 0.40 percentage points to 5.6 percent and the 12-month benchmark deposit rate by 0.25 percentage points to 2.75 percent.

Read MoreStocks surge as China cuts rates

The move was accompanied by a slight liberalization of the rates banks pay to borrowers, allowing banks to pay depositors 1.2 times the benchmark level, up from 1.1 times previously.

The central bank's first rate cut since 2012 is a sign policymakers are becoming increasingly concerned about slowing growth momentum and an admission that targeted easing has not been enough, say economists.

However, they are skeptical about whether the rate cut will indeed spur faster credit growth in the mainland.

"I wonder how much banks are actually going to respond in lending more because interest rate cut is asymmetric, and so why would they necessarily go out and lend more on the back of this," said Frederic Neumann, co-head of Asian economic research at HSBC.

Read MoreSlower growth, regulation trim China's shadow banking

Adams agreed the move would do little accelerate credit growth, which is currently low by historical standards. Credit growth slowed sharply in October, with local-currency bank loans increasing by 548 billion yuan ($89 billion) from the previous month, the third-lowest monthly rise since 2012.

Call for more liquidity

The effectiveness of the latest monetary easing will depend on whether the central bank complements the rate cut with a liquidity injections, said Ting Lu, chief China economist at Bank of America Merill Lynch.

"Cutting benchmark lending rates will help those borrowers of medium-to-long-term loans lower [their] debt burden. However, to make it a more real boost for the economy, the PBoC will have to inject more liquidity," he wrote in a note.

"So the PBoC needs to supplement rate cuts with liquidity injection actions such as RRR (reserve requirement ratio) cuts," he added.

Ting expects the central bank to follow through with a RRR cut in December.

Start of an easing cycle?

And the central bank is unlikely to stop there. Many economists believe Friday's move is the beginning of an easing cycle.

"We have long argued that such cuts were unavoidable and that lowering the interest rate will help reduce the debt burden, support business sentiment, and sustain private demand. We now look for another two symmetric cuts in the benchmark interest rates by 25 basis points each in H1 2015," said Jian Chang, chief China economist at Barclays.

Read MoreChina ready to cut rates again: Sources

Further stimulus may not just come in the form of monetary policy easing, say analysts, noting that fiscal measures are also on the cards.

"The cuts themselves are unlikely to have a major impact on the Chinese economy, but the intent signaled will," said Evan Lucas, strategist at IG.

"The lowering of interest rate signals that growth is still a major driver of policy in China (as it always has been), meaning all leavers are in play. Watch for increased funding allocations in support of growth in the next 12 months," he said.