People’s Bank of China Reduces One-Year Lending Rate by 40 Basis Points to 5.60%

November 21, 2014

In addition to the lending rate reduction announced today and effective tomorrow, monetary officials lowered the one-year deposit rate by 25 basis points to 2.75% and lifted the upper limit of the floating range of interest on the deposits of financial institutions from 1.1 times to 1.2 times.

Chinese monetary policy easing came in from the cold today.  Prior unannounced accommodation against the backdrop of falling inflation and likely sub-target growth had taken the form of selective liquidity injections through a discreet large loan to the China Development Bank, establishment of the Medium-Term Lending Facility that provides loans to commercial banks, and other daily operations.  But there had not been a change in the PBoC’s benchmark rates, the one-year lending rate or the one-year deposit rate, which had been at 6.0% and 3.0% since cuts of 31 basis points and 25 bps on July 5, 2012.  Those rates were also cut by 25 bps apiece on June 7, 2012.  Before that, four engineered increases of each rate between October 2010 and April 2011 had lifted the lending rate to 6.56% and 3.50%.  Those highs had been lower than the pre-Great Recession peaks of 7.47% and 4.14%.  Within the final 3-1/2 months of 2008, five cuts on September 15, October 8, October 24, November 26, and December 22nd slashed the benchmarks to 5.31% and 2.25%, respectively.  China’s massively aggressive monetary and fiscal stimuli played an heroic role in the Great Recession that paved the way for an early recovery in Asia, and the locomotive that the global economy craved was found.  But Chinese debt had subsequently ballooned to about 250% of GDP, and comparisons of China’s possible fate to what Japan experienced after 1990 could be heard increasingly.

As Chinese GDP growth slowed more recently, therefore, monetary officials had adopted a more ambivalent response.  Officials also have wanted to promote a transformation in China’s economy away from the property boom and business investment and toward greater reliance on personal consumption.  On-year growth had decelerated from 11.8% in the first quarter to 2010 to 9.7% in 1Q11 and 7.4% in 1Q12, and there was no subsequent sharp rebound.  In the year through the third quarter of this year, real GDP went up 7.3%, setting the likely stage for the slowest calendar year expansion since 1990.  The 7.7% 12-month rise in industrial production recorded in October was down from 9.2% in June the smallest advance since 2009.  Fixed asset investment growth of 15.9% in January-October is down from 19.6% in full-2013 and at a 13-year low.  October’s 1.6% CPI inflation rate constitutes a 57-month low, and M2 money growth slowed 2.1 percentage points from 14.7% in June to 12.6% in October.

Add to this mix the volatility of financial markets in recent months, Japan’s dip into recession, and Europe’s pull toward deflation, and Chinese monetary officials in acting more boldly today clear felt that a stronger message had to be sent.  Having done so, The PBoC still faces conflicting objectives that argue against the kind of repeated easings undertaken in the fall of 2008.  Any future policy changes are apt to be reactive rather than proactive, meaning that data trends will have to veer further from the comfort zone of officials before they ease again.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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