China Rate Cut Coming Soon? Don’t Bet On It
Assistant Producer, CNBC Asia
Despite market speculation that China’s central bank may cut interest rates soon, strategists in the region tell CNBC that such a move is unlikely as recent economic data do not point to a huge slowdown to warrant aggressive monetary easing.
“While recent economic data have increased the probability of a lending rate cut, and we do see some market participants talking about it, we think the People’s Bank of China will cut lending rates only on a further deterioration in data,” Kumar Rachapudi, strategist, Asia research and strategy at Barclays, said.
In a front-page editorial on Wednesday, state-backed China Securities Journal said that China should cut interest rates soon to build confidence. The paper said conditions were ripe for a cut in interest rates as inflation had eased, producer prices were in a downward trend and other emerging markets had also been easing monetary policy.
Rachapudi argues that the government has already been taking pro-growth measures, such as stepping up approvals for new investments, which should show up in increased bank lending in May.
On Tuesday, the China Securities Journal said new lending at the "Big Four" state banks totaled 253 billion yuan ($39.75 billion) in May, while credit across all financial institutions grew by an estimated 700 billion yuan.
Therefore the “current situation warrants measured easing, for example reserve requirement ratio (RRR) cuts, (and not rate cuts),” Rachapudi said.
Economists at Barclays expect the central bank to cut banks’ reserve requirements by a further 100 basis points this year. The central bank last delivereda RRR cut on May 18 — its third such move in six months.
Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup, said she too isn't expecting an interest-rate cut in the coming months as “inflation has not come down dramatically enough and there is a general sense that there has been a pick up in new loans.”
Inflation Is Key
Donna Kwok, economist, Greater China economics research at HSBC, however, said there is a possibility of a quarter percentage point cut to the benchmark lending and deposit rate at the end of the month or in July. But, she notes inflation would need to fall below 3 percent in order to spur such a move.
In April, inflation came in at 3.4 percent and is expected to ease in May to 3.2 percent.
“Beijing will unlikely cut rates until CPI falls to less than 3 percent, because with deposit rates sitting at 3.5 percent, a premature cut would result in negative (real) interest rates which could further drive deposits out of saving accounts,” she said.
China’s benchmark one-year lending rate is 6.56 percent and the one-year savings rate is 3.5 percent.
Kwok agreed that the central bank will further cut the reserve ratios, forecasting cuts up to 200 basis points for the rest of the year. She said that measures such as RRR cuts are more effective in increasing liquidity than interest rate cuts.
“We've always considered RRR cuts, loan quotas and other forms of quantitative measures as more effective,” Kwok said. “Their effect is near immediate and comes without a time lag. We estimate each 50 basis point cut releases approximately 400 billion yuan of liquidity into the system.”
—By CNBC Asia’s Ansuya Harjani