Can another interest rate cut be far behind after China’s central bank yesterday made another cut in the reserve asset ratios of the country’s banks in an effort to force more money to be lent to struggling businesses?
The central bank has cut interest rates twice since November in a bid to lower borrowing costs and spur demand. Yesterday’s cut in the reserve ratio was the second since last November.
News of the move will go someway to offsetting the expected slide in Chinese and Asian stockmarkets this morning after the country’s stockmarkets and regulators tightened some key rules (on margin lending to buy shares) after trading closed for the week last Friday night.
In fact the cut in the reserve ratio will make more money available to be invested in the markets from this week – a move that might help offset any selling pressure from Friday night’s moves by Chinese regulators to try and cool the overheated equities boom.
Those moves added to the pressures on markets in Europe and the US which dropped sharply on Friday night.
The latest cut in the reserve ratio by the People’s Bank of China (PBOC) was made late yesterday and saw the reserve requirement ratio for all banks by 100 (1 percentage point) basis points to 18.5%.
It is only the second time the ratio has been cut by a full percentage point – the last was in the depths of the GFC in late 2008.
On top of the basic cut, an extra one-percentage point cut will be given to commercial banks for agricultural services and an additional reduction of two percentage points to the Agricultural Development Bank of China.
The central bank said it will further lower RRR by 0.5 percentage point for eligible banks that lend a certain amount of loans to agricultural borrowers or small and micro businesses. The reductions are effective from today, April 20.
Chinese economic activity is struggling, weighed down by a continuing property downturn, factory overcapacity and rising debt, and rising interest rates (in real terms for manufacturers who have been hit by 37 continuous months of price deflation).
Economic growth is slowing, as the GDP figures for the first quarter showed, rising at an annual rate of 7% (down from 7.3% in late 2014). Growth is expected to slow to a quarter-century low of around 7% this year from 7.4% in 2014, even with expected additional stimulus measures.
The PBOC last cut the reserve requirement ratio for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012.
The cut came 24 hours after the last major data drop for March was issued by the country’s statistics bureau showing another fall in Chinese house prices last month – but there were signs of a moderation in some of the figures.
That could indicate the move by the government to ease rules on buyers of second houses (a key area of demand for homes) might be having an impact.
Spring is also the major home buying season in China and for that reason, analysts were expecting signs of a moderation in the weak price data over autumn and winter.
The National Bureau of Statistics said average new home prices in China’s 70 major cities fell for the seventh consecutive month in March from a year earlier, down 6.1%.
The Bureau said new home prices in Beijing fell 3.7% last month from a year earlier, against the previous month’s drop of 3.6%. Encouragingly, prices rose 0.3% between February and March.
Shanghai’s home prices were down 5.1% last month from a year ago, versus a 4.7% fall in February. They were flat in March from February.
The Bureau said that that of 70 large and medium-sized cities surveyed, new home prices dropped in 50 in March from the previous month.
New home prices were flat in eight cities including Shanghai and Haikou, while 12 cities like Beijing saw prices up from February.
For existing homes, prices fell in 48 cities. That’s better than in recent months when falls were recorded in most of the 70 cities.
