Easier Chinese Monetary Policy

June 29, 2015

The People’s Bank of China announced several policy-easing steps over the weekend.

The one-year lending rate was cut to 4.85% from 5.10%.  Prior reductions in in November, February and May had trimmed the rate by a total of 140 basis points from 6.00%, and there were also single cuts of 25 basis points and 31 bps in June and July of 2012. 

The one-year deposit interest rate was cut to 2.00% from 2.25%.  this was the fourth cut of 25 basis points since November.  The deposit rate was cut by 25 bps in June 2012 and by 26 bps one month later.

Reserve requirements were cut for a number of targeted sectors that have not been stimulated by previous blunter policy easings. 

Easier monetary policy is a response to China’s slower economic growth, depressed property market, excessive disinflation, and weak money growth.  On-year real GDP growth has slowed from 11.1% in the first half of 2010 to 7.4% last year and 7.0% in the first quarter of 2015.  Industrial production growth of 6.2% in January-May of this year is down from a 7.9% increase in full-2014, and the 5-month 11.4% growth pace of investment so far this year is down from 15.7% in full-2014.  Chinese exports and imports posted on-year declines in May of 2.5% and 17.6%.  In the year to May, consumer prices rose only 1.2%, down from 2.3% in June and July of 2014.  Property prices were 5.7% lower in May than a year earlier, posting month-on-month declines in 41 of 70 monitored cities.  M2 money expanded 10.8% in the year to May, down from 12.2% in December and 14.7% in June 2014.

Officials opted for a selective reduction of reserve requirements this time instead of an across-the-board cut as done in February (50 basis points) and April (100 basis points) of this year in order to target the stimulus to areas that clearly need the help and to avoid the stimulus instead being channeled into the stock market rather than for business investment.  The notable thing about today’s easing is that it combined a cut in interest rates with an element of reduced reserve requirements.  Generally, the PBOC one or the other of these tools but not both at the same time.  The employment of multiple tools to ease credit policy at the same time is being perceived as an aggressive measure and probably not the last one of this year. 

Officials continue to refrain from depreciating the yuan.  It’s been held steady against the dollar that’s rising against a wide variety of currencies, including the yen, whose value is determined by market forces.  If dollar strength intensifies from a Greece-inspired flight to safety, Chinese officials may be tempted to let their currency fall against the dollar, thereby limiting gains against other currencies.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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