PBOC Rate Reduction Is First in More Than Two Years
By LINGLING WEI
BEIJING—China’s central bank succumbed to political and market pressure and cut interest rates for the first time in more than two years, in a sign that the country’s leadership is leaning toward more sweeping measures to bolster flagging economic growth.
The surprise move by the People’s Bank of China late Friday comes after a series of piecemeal easing measures that failed to encourage banks to lend and companies to borrow. Several economic indicators—from investment growth to factory production to retail sales—showed weakness last month. Economists say China could miss its annual growth target—set at about 7.5% for 2014—for the first time since the 1998 Asian financial crisis.
China’s economy, the world’s second-largest after the U.S., grew by 7.3% year-over-yearin the third quarter, its slowest pace in more than five years.
On Friday, the central bank said it cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%, making it cheaper for business to borrow in order to hire or expand and marking the first interest-rate cut since July 2012. The PBOC also reduced the benchmark one-year deposit rate to 2.75% from 3% but gave banks greater flexibility to raise deposit rates above that benchmark.
The bank’s move contributed to a surge in global stock markets as well as a strengthening of the currencies against the U.S. dollar in countries anticipating higher demand from China.
The central bank, under longtime Gov. Zhou Xiaochuan , had resisted calls from both within the government and those in the financial markets and corporate sector to cut interest rates. Bank officials feared that broadly easing credit would worsen China’s debt problems and put the economy at greater risk, according to People’s Bank officials.
Instead, it had tried to channel credit to sectors deemed important for China’s growth, including small and rural businesses as well as government-financed low-income housing projects.
As recently as last month, the PBOC’s chief economist, Ma Jun, said China wouldn’t need to embark on broad-based stimulus plans even as growth slows, saying big measures would only cause more credit to flow into industries that already suffer from excess capacity, such as steel and real estate. In a response to reporters on Friday, Mr. Ma said the risk of deflation, or falling prices, is putting “upward pressure” on real interest rates in China’s economy, which contributed to the decision to cut benchmark rates now.By lowering lending rates, the PBOC is acceding to demands from the Beijing leadership to reduce financing costs for businesses, according to Chinese officials and advisers to the bank. Unlike the U.S. Federal Reserve, the PBOC isn’t independent. It answers to the State Council, the government’s top decision-making body, which earlier this week issued a statement urging a reduction in financial burdens for the real economy.
In a statement posted on its website, the PBOC said credit has become more expensive and harder to come by for some businesses since July, despite a number of measures taken by the State Council. The rate cut, it said, would help return interest rates to “a reasonable level” and solve the corporate sector’s financing difficulties.
But the central bank maintained that China’s monetary policy remains “neutral,” saying China’s economy will keep growing at a fast pace despite the current downward pressure.
“It’s a face-saving move by the central bank,” says Peng Junming, head of Junfan Investment Co., a private investment firm in Beijing. “The interest-rate cut means the monetary policy is going from being relatively tight to neutral to loose.”
Part of the central bank’s earlier hesitance was fear that the move would be interpreted as a repeat of China’s old playbook of fueling growth with debt, according to advisers to the central bank. A big stimulus plan launched by China to respond to the 2008 financial crisis has saddled the country with debt and wasteful projects.
But many Chinese officials say the country will have to significantly ease monetary policy and increase public spending to maintain its current growth rate. Big-ticket spending is already picking up: Since mid-October, Chinese authorities have approved railway and airport projects valued at 845 billion yuan ($138 billion).
In September and October, the central bank injected more than $126 billion into Chinese banks in the hope that the funds could lead the banks to lend more. But so far, those efforts haven’t paid off. Economists and analysts say some of the difficulty stems from the traditional reluctance of China’s big banks to lend to small businesses, a hesitance that is increasing as economic growth slows and it becomes more likely that loans will go bad.
Meanwhile, a lack of real demand for loans, rather than a shortage of credit, is also holding the economy back. That explains a recent drop in the rate of overall credit expansion in China despite the PBOC’s easing efforts.
According to official data, Chinese banks issued 548.3 billion yuan of new loans in October, down from 857.2 billion yuan in September and below the 626 billion yuan forecast by a Wall Street Journal poll of 11 economists. M2, China’s broadest measure of money supply, grew 12.6% at the end of October year-over-year, lower than the 12.9% rise at the end of September.
Some economists and analysts expect the PBOC to cut rates several more times next year, as the property sector—a main engine of China’s economic growth until recently—is expected to continue its slump and Beijing’s sweeping anticorruption campaign keeps damping investment and consumption. Meanwhile, rising risks of deflation also leave the central bank room to ease without having to worry about spurring inflation.
original source: http://online.wsj.com/articles/china-central-bank-pboc-cuts-interest-rates-1416567408