PBOC cuts rates again, but ANZ says real interest rates still 10%-plus

BEIJING – Following a massive sell-off in  China’s stock markets on Friday - causing a drop of more than 7% in one day, the People’s Bank of China (PBOC) on Saturday simultaneously dropped both interest rates and reserve ratio requirements (RRR), something not seen since the financial crisis in 2008. The People’s Bank of China said one-year lending and deposit rates would be cut by 25 basis points to 4.85% and 2.)% respectively.

As the official Xinhua News Agency reported the moves: “China's central bank cut both the requirement reserve ratio (RRR), the amount of reserves banks are required to hold, and benchmark interest rates on Saturday. The credit-easing move, to be effective on Sunday, aims to "support the real economy and promote restructuring" said the People's Bank of China (PBOC) in an announcement.”

ANZ Bank reported that in the meantime, the PBoC will conduct targetted reserve requirement ratio (RRR) cuts towards financial institutions. For commercial banks that meet certain level of loans to agricultural and SME sectors, the RRR will be lowered by 50bps. The central bank will also cut the RRR for financial companies by 300bps.
“This is not surprising given that real activity indicators remained weak in April and May, and indicate that China’s economy may have missed 7.0% growth in Q2,” ANZ reported. “In fact, the PBoC has resumed reverse repo operations in the past week, and increased the size of the Mid-term Lending Facility (MLF) recently. All these moves suggest that China’s monetary policy will remain accommodative.  

”However, monetary policy easing so far has had a limited impact on improving growth momentum, pointing to an ineffective policy transmission process. While liquidity conditions remain extremely relaxed in the inter-bank market, commercial banks are still reluctant to provide loans at a lower price to corporates due to credit concerns.
“As a result, real interest rates faced by Chinese companies are still above double digits. The PBoC also acknowledged that, and said that it has to rely on policy rate adjustment to force banks to lower the cost of loans.
“In the meantime, the central bank also argued that a universal cut of the RRR will have limited impact, as commercial banks are holding large amount of cash on their balance sheets and inter-bank market interest rates have been an extremely low level since March. Therefore, the central bank conducted selective RRR cuts to encourage banks to provide funds to real economy.”
ANZ says that while its forecast rate cuts for this year have been fulfilled, continuously weak price trends suggest an additional 25bps interest rate cut is still highly possible in the second half of the year. www.live.anz.com www.webershandwick.cn (ATI).