The People’s Bank of China (PBoC) is expected to cut the benchmark interest rate on loans twice more before the end of next year’s first half, each time reducing it by 25 basis points (0.25 percentage point), Citigroup said Thursday.
The one-year rate on deposits is likely to be reduced by the same amount as the rate on loans, it said.
Whether the central bank will lower the interest rate further will depend on the property sector, Shen Minggao, head of China research at Citigroup Global Markets Asia Ltd, said in a media briefing.
“Whether sales in the property sector can stabilize after a reduction in the interest rate or relaxation in home loan regulations is a key area of concern. If the property sector is not stable, the downward pressure on the economy will remain,” he said.
Shen said a cut in the interest rate is more important than a reduction in the reserve requirement ratio (RRR) for banks, as the former can help boost demand for credit, while the latter is mainly aimed at expanding the supply of credit.
“Corporates do not have a strong demand for credit. It’s also OK to influence demand by cutting the RRR, but the effect is not as good as a cut in the interest rate, which reduces the financial cost directly and stabilizes market expectations,” he said.
Meanwhile, Shen said China is likely to experience growth in gross domestic product (GDP) of under 7 percent for the first time next year since 1990 owing to adjustments in the domestic property market and uncertainty in global markets.
“The Chinese government is likely to set the growth target at 7 percent. Our forecast is 6.9 percent for next year. The Chinese economy is facing some deflationary pressure, and the consumer price index is very likely to grow less than 2 percent in 2015,” he said.
He said 2015 will be the first year of a seven-year economic cycle for China, and the world’s second-largest economy is expected to achieve stable growth of between 6 percent and 7 percent each year during this period.
“President Xi Jinping wanted to double 2010 GDP in real terms by 2020 … In order to achieve the growth target in 2020, the GDP growth rate cannot be slower than 6 percent,” Shen said.
If it slows to 6 percent or below, he said he expects policy easing to take place.
As for mainland stocks, Jason Sun, chief China strategist at Citigroup, said valuations in the A-share market are cheap and growth in earnings per share can reach 7 percent in the coming year.
The bank set a target earlier for the CSI 300 Index of 3,000 by the end of 2015, meaning upside potential of about 15 percent.
Sun’s top picks are the insurance, finance, property, technology, consumer and transportation sectors.
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