World Economy

China Reducing Interest Rates Again

China Reducing Interest Rates AgainChina Reducing Interest Rates Again

China is poised to deliver deeper interest rate cuts after yesterday’s unexpected decision to reduce borrowing costs for the first time since 2012.

With the world’s second-largest economy on track to record its weakest annual growth since 1990, economists at JPMorgan Chase & Co., Barclays Plc and UBS AG all said the People’s Bank of China will act again to shore-up demand, Bloomberg reported.

Global stocks, oil and metal prices all rose as China sided with the euro-area and Japan in delivering fresh stimulus. Risk the nation will undershoot its official growth target of about 7.5 percent this year, slowing inflation and elevated funding costs suggest more action to come.

The announcement signals a “policy shift towards more aggressive monetary easing,” said Haibin Zhu, chief China economist at JPMorgan Chase & Co. “This reflects the government concern about near-term growth and the desperate efforts to lower the funding cost for the corporate sector.”

In moves that take effect Monday, the PBOC pared its one-year lending rate by 0.4 percentage point to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent.

The decision marked a switch from the PBOC’s recent practice of choosing selective monetary easing and liquidity injections over interest rate cuts. It also showed an increased bias by policy makers toward pro-growth policies even if they fuel a build-up of debt they previously resisted.

Slowing Growth

The economy’s slowdown deepened in October, jeopardizing the government’s growth goal. Factory production rose 7.7 percent from a year earlier, the second weakest pace since 2009, and investment in fixed assets such as machinery expanded the least since 2001 from January through October.

Adding to the global fears of deflation, consumer prices increased 1.6 percent in October from a year earlier, matching September’s pace that was the slowest since January 2010, and producer prices fell for a record 32nd month.

The “rate cut clearly signals that China’s central bank has changed its monetary policy stance to a more accommodative one,” said economists Li-Gang Liu and Hao Zhou at Australia & New Zealand Banking Group Ltd. in Shanghai. “The conditions for further policy easing are ripe.”

The ANZ economists said the impact of yesterday’s reduction may still be limited because the lending rate carries less sway over the economy than other policy tools, such as a reduction in reserve requirements.

Debt Service

With banks potentially choosing not to cut their own lending rates, companies may also still find it remains costly to raise funds. Aggregate financing in October fell to 662.7 billion yuan ($108b), the central bank said Nov. 14, from 1.05 trillion yuan in September.

The main effect of the cut will be to make it easier to service debts and improve cash flow within companies, said economists Harrison Hu and Ning Zhang at UBS. It will have less of an impact on corporate credit demand, which will remain depressed by excess capacity in the economy and weak household spending, they said in a report predicting the lending rate may fall another 50 basis points by the end of 2015.

Zhu at JPMorgan said further cuts will probably be accompanied by reductions in the reserve requirement, targeted lending and more liquidity injections.