China’s Government Eases, Stimulates In Response To Stock Market Turmoil
$UBS, $JPM, $BCMXY
The Chinese government easing of monetary policies is much more than a response to the recent stock market turmoil, as it aims mainly to lower borrowing costs and shore up economic growth.
Tuesday, the People’s Bank of China (PBOC), the central bank, announced cuts in the RRR (reserve requirement ratio) and a lowering of interest rates, following a 4-day losing streak on the stock market that cut the benchmark Shanghai index by more than 20%.
On 6 September, the RRR for financial institutions will be cut by 50 bpts. The RRR for financial leasing companies and companies providing car loans will be lowered by 300 bpts.
From Wednesday, interest rates for 1-year lending and deposits will be cut by 25 bpts to 4.6 and 1.75% respectively.
The government measures helped halt the free fall on the stock market, with the Shanghai index seeing its decline narrow to 1.27 % Wednesday, down from a 7.63% plunge Tuesday and 8.49% Monday.
European stock markets mostly rose Tuesday after turmoil in the global markets Monday. Major indices in the United States also witnessed narrowing declines on Tuesday compared with previous trading days.
UBS (NYSE:UBS) chief economist Wang Tao said the move signaled the Chinese government’s determination to safeguard financial stability and helped shore up sentiment in financial markets.
But that was only a small part of government intentions, as China still faces huge downward pressure on economic growth.
China is lowering financial costs and maintaining reasonable liquidity to ensure steady growth, said Ma Jun, chief economist at the central bank’s research bureau.
“It was necessary to cut RRR and interest rates again to stabilize market expectation both at home and abroad, in a showcase of China’s role as a responsible large nation,” Ma said.
This is the 4th time the PBOC has cut both RRR and interest rates since the beginning of this year.
The rate cut is seen as the latest effort by the central bank to lower corporate funding costs and shore up the economy, after recent weaker-than-expected economic indicators disappointed global investors.
A main gauge of factory activity, the Caixin flash China general manufacturing PMI slipped to 47.1 in August, the lowest reading since March 2009, while the year-on-year growth in industrial output slowed to 6 percent in July, also down from a month earlier.
Zhu Haibin, chief economist for JP Morgan China, said the PBOC’s rate cut reassured the market due to growing government concerns about the economy.
Wang also recognized the necessity of the move.
“Although financing costs have retreated somewhat, real interest rates have stayed high due to ongoing deflationary pressures, especially the contraction in the PPI,” she said.
China’s producer price index (PPI), a measure of costs for goods at the factory gate, fell 5.4% Y-Y in July, the 41st straight month of decline.
Wang expects the PBOC to cut the benchmark rate once more late this year to further reduce real financing costs.
China’s economy grew in 1-H of the year by 7%, its lowest level since the global financial crisis. But analysts said the growth rate is likely to pick up based on support policies during the rest of the year.
The RRR cut came amid strong market expectations of easing measures by the central bank to lessen the liquidity strain caused by shrinking funds outstanding for foreign exchange and the depreciation of Chinese currency the RMB Yuan.
Analysts believe the cut will effectively replenish the market and relieve cash-starved financial institutions.
Wang estimated around CNY700-B (US$109-B) of liquidity will be released immediately.
Giving out a similar projection, Lian Ping, economist with the Bank of Communications, wrote in a research note that the cut in deposit reserve ratio will prompt banks to expand credit and enhance their capacity to support the real economy.
The effects of the cut were instant and evident.
Wednesday, the benchmark overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one other, retreated to 1.786% from Tuesday’s 1.879%.
“The RRR cut, therefore, is necessary to keep base money supply stable, and to ensure a steady growth of money and credit in the coming months,” Wang said.
The money market has been suffering from lack of liquidity since the end of July despite repeated cash injections by the PBOC through less powerful operations including reverse repurchase agreements and short-term lending facilities.
Economists predict more easing measures from the Chinese government in 2-H of this year.
Stay tuned…
HeffX-LTN
Paul Ebeling
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