People’s Bank of China cuts interest rates again5 July, 2012, 19:11. Posted by Zarathustra
The People’s Bank of China, just like last time, announces interest rates cuts at the precise moment when the Bank of England announces its rate decision.
The 1-year deposit rates are cut by 25 basis points with rates at all maturities being cut by a varying degree. Most notably, fixed deposit rates at the longer end are cut more: 3-year by 40bps and 5-year by 35bps. Meanwhile, lending rates of most maturities are cut by 25bps with the exception of 6-12 month benchmark, which is cut by 31bps.
More significantly, however, is that the lower-bound of lending rates are being lowered from 0.8x of the benchmark rates to 0.7x of the benchmark rates, while the upper-bound of deposit rates remains unchanged at 1.1x of the benchmark rates.
As a result of the new lower-bound (or deeper discount being allowed for), the interest rates cut this time is again very asymmetrical. Taking the 0.8x to 0.7x lower bound reduction in lending rates, rates are cut by 76-86bps depending on maturity, which is a very aggressive move.
We speculate that policymakers in China are getting ever more worried about the economy as more and more signs of slowdown are surfacing from across industries. Although we saw that data in May was not as disastrous as we feared, we also noted that because Chinese macro-data are heavily massaged, the economy might actually be in an even poorer shape than the data would lead you to believe. That is evident when you look at some indirect gauges and anecdotes we read and hear on a daily basis.
The chart below shows the PBOC benchmark rates setting for 1-year deposits and 1-3-year lending.
Source: People’s Bank of China