On Saturday, China’s central bank slashed the one-year benchmark lending rate by 25 basis points to 5.35 percent and the one-year deposit rate by 25 basis points to 2.75 percent.
The move had been widely expected.
Macro economic numbers on manufacturing, housing sales and electricity and coal consumption were fairly sluggish during the Lunar New Year holiday.
And domestic consumption has been weakening recently, prompting the move by the central bank to stimulate growth.
The cuts are a boon for the property sector.
Lower interest rates will reduce the debt burden of property developers and help stabilize housing demand.
However, the reductions have a mixed impact on mainland banks.
On one hand, these will tighten their interest margin, weighing on their operating profits. Also, the lower deposit rate makes it harder for banks to attract depositors.
On the other hand, if loans start to grow amid improving economic growth, banks will benefit from long-term growth.
In other words, the cuts may have an adverse impact in the short term but have a positive outcome in the long run.
How stock prices will respond largely depends on the mood of investors.
Also, lower interest rates will boost commodities including base metals in the short term.
For example, base metal plays in the A-share market rallied after the European Central Bank cut benchmark rates in September.
The reduction improved the fundraising ability of some companies and also reduced their costs.
For those struggling with tight liquidity and massive capital demand, it came as a reprieve.
These sectors included real estate, construction, military enterprises and electronics.
Meanwhile, lower interest rates will rein in the renminbi exchange rate, benefiting Chinese exporters.
The rate cuts came against a backdrop of mounting expectations for renminbi depreciation.
A weaker renminbi will enhance the competitiveness of Chinese exporters, particularly listed garment and home appliance companies, but hurt A shares across the board.
Chills began to sweep the market a few years ago. As a result, a number of foreign investors have been fleeing the country.
In addition, China’s economic restructuring is facing challenges, with many state-owned companies gone bust.
Deflation is approaching, judging from the latest macro economic and monetary data.
The real economy continues to grapple with tight liquidity because of overinvestment in inefficient state sectors.
The central bank could roll out further monetary easing to stabilize growth this year.
This article appeared in the Hong Kong Economic Journal on March 2.
Translation by Julie Zhu
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