China’s Rate Cutting Lightens Debt & Financing Cost
Saturday, China began life under a regime of historically low interest rates.
The People’s Bank of China (PBOC), the central bank, announced late Friday that both benchmark deposit rate and lending rates will be lowered by 25 bpts from 24 October
The PBOC also cut the reserve requirement ratio (RRR) again for all financial institutions; this time from 17.5 to 17% the 6th policy rate cut and the 4th universal cut in the last year.
The cuts bring down the 1-year benchmark lending rate to 4.35%, and 1-year benchmark deposit rate to 1.5%.
“Deposit and lending rates are at their historical lows, which should help alleviate burden of existing debt and lower financing costs,” Lian Ping, chief economist with the Bank of Communications, wrote in a research note.
Lian said Chinese companies are still under pressure in interest payments and financing cost owing to producer price index (PPI) deflation. The PPI, a measure of costs for goods at the factory gate, fell 5.9% Y-Y last month, the 43th straight month of decline.
PPI deflation widened in Q-3 and the real interest rate burden for corporates moved up, said Zhu Haibin, chief economist for JP Morgan China.
“Although the PBOC had lowered benchmark rates 5 times before Friday, real interest rates have remained higher than a year ago and corporate debt service burden has worsened considerably in the past year,” said UBS economist Wang Tao in a research note.
Th real 1-year lending rate is currently close to 7%, compared to around 6.3% last November, according to Wang’s research note.
Friday’s cuts in the context of further weakening of industrial activity, indicate that the PBOC has “finally become more concerned about deflationary pressure and the rising debt burden,” she said.
Last Monday macro economic data for Q-3 showed GDP expanding by 6.9% in Q-3, the slowest Quarterly growth in 6 years. A strong services sector performance concealed the fact that nominal secondary industry value added grew 0.2% and that of industrial sector declined by 0.2%, the worst outcome in more than a decade, Wang said.
As real activity slows, additional cuts are needed to support the corporate sector, she said and Zhu Haibin agrees.
Zhu said the rate cut could relieve the interest burden for local governments and thus contain financial risk. Going forward, Zhu said there is still room for further RRR cuts, but Friday’s interest rate cut may be the end of this rate cut cycle.
Wang, however, expects the PBOC to cut interest rates 1 more time this year and once again in early Y 2016 to bring 1-year deposit benchmark rate to 1% and lending rate to 3.85%.
“Further monetary easing can help to reduce debt service burdens and improve corporate cash flows,” she added.
By Tian Shaohui
Paul Ebeling, Editor
HeffX-LTN
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