China Lowers BLR & SRR

China took the market by surprise by announcing a 27 basis point cut in the nation's benchmark lending rate yesterday. The cut, coming amid turmoil in the global financial sector, lowers the cost of one-year bank loans to 7.20 percent and is effective from today. The People's Bank of China also lowered the reserve requirement for all lenders except the country's five biggest banks and the Postal Savings Bank by 1 percentage point. It is the first time that the PBOC has lowered the proportion of deposits that lenders must hold in reserve since November 1999. The cut in reserve requirements is effective from September 25, the central bank said.

Industrial output grew by 12.8% year on year in August, versus 14.7% in July, and 17.5% last August. There was weakness in almost every sector, with iron and automobile production actually contracting versus one year ago. Clearly the industrial sector is slowing, and this puts all the more pressure on rising consumer demand to keep the economy strong.

Retail sales grew by 23.2% year on year in August, slightly less than July’s 23.3% but substantially better than last August’s 17.1%. This growth, however, may have more to do with Olympics spending than with long-term trends, and we will probably need to see September and October numbers to get a real sense of how consumers are responding.

Loan and M2 growth were also slightly weaker than expected. The continued rapid growth of foreign currency reserves at the PBoC is probably being countered by the sharp fall in real estate and stock prices to represent money growth below what we would have expected. The fact that loans in the banking system grew by less than they could have under the loan caps, suggests that either companies are reluctant to borrow and invest because of concerns about the slowing economy, or that banks are reluctant to lend because of credit fears.

The slowing Chinese economy is understandable, it was engineered. The central bank wanted to curb hot money in stocks and property. They have been quite successful in both. A bit too successful in fact that they are now a bit worried. A couple of weeks ago, they came out with renewed infrastructure spending. If you were to be in China and ask around, many businesses are frozen because they cannot get new funding. So much so that many are relying on informal sources of funds. The lowering of the reserve requirement is a big sign that Beijing is keen to ease the water tap. Same for the lowering the bank lending rate. We can expect similar easing moves in rapid succession.

The initial moves may not move the dinosaur, it will take a couple more moves to ease both rates before investors gain sufficient confidence. Still, these are important steps in deciphering the thinking behind the central bank of China.

p/s photos: Carissa Putri


Ivan said…
Hi Dali,

It seem is good and +ve to the market. Perhaps this can make a "temporary break" for china market to fall in down trend.

Anyhow, over short run (from now going onward till year end) 2008, I still bearish with the market.

China maybe easily can break 2000 level and try find a Support level at 1500 due financial company is in tsunami trend now... (oops.. i am talking nonsent)

solomon said…
This is a good move to shore up credit confidence. The other Central Banks in the world should follow suit this week except for the Fed.

If the Fed reduces rate, it will be another financial catastrophe yet again.

The event happened yesterday in US is forward looking. It may sound end of day for some traders but I think the fact remains that one needs to flush out the bad credit.

I am also watching some structural changes in oversight bodies in UK and US. Hope they could do good in the long run.
Datuk said…
I am extremely pessimistic over the economy outlook in china especially in 2009 for the following reasons:

i) The growth model that driven by export orientated won't be sustainable in the current economy meltdown.

ii) The reduction of wealth in household as a result of the ongoing weak performance in equity market. Thus, weaken the domestic consumption.

iii) The high ratio of corporate and individual debt will impact the financial market. In addition, the weak corporate governance will ruin the entire financial industry.

I won't be surprised if China is going to the add huge problem to the already vulnerable weak of world economy.

Be prepared for the upset news from China in the next few months.

Cash is the king !
bindi said…
I have posted a comment in your column (before your columns are 'syndicated' in the papers)on the issue of subprime before it became widespread today -

and i remember vividly espousing the coming of the big meltdown (which incidentally lehman going under is nothing - the worst is coming with some big global brand name going under) yet you were adamant saying it wouldnt have any material affect if employment is still up and subprime is non issue.

Baloney Baloney Baloney Dali!.This is a balance sheet problem not a subprime issue. We will be seeing level 3 and 4 accounting coming on the open.
solomon said…

I do agree with you except for growth model may have self sufficient elements, even though they are mainly for exports.

I think China will add to the problem, but the magnitude would be more far reached if it is from Europe.

Cash is the King....CONFIDENCE is what we need now...But what we lacking is TIME. Perhaps, in near term, they could be a war to divert the international focus if history did repeat itself.
lsb said…
China will continue to defy conventional wisdom. The shake-up in US will only accelerate a new world trading mechanism; and this overhaul is overdued. USSR is taking the lead and accepts only its own currency in its oil sales.
wk said…
Hi Dali,

Been reading your blog for awhile now and am amused by your knowledge in the finance area. May I know what materials do you read to keep updated?
ru40342 said…
i really don't understand the action taken by the people's bank of china.

They try so hard to control high inflation rate and prevent the economy from overheated for quite some time yet they now lower the blr and srr.

So now everything will go back to few months ago where inflation rate rule again and poor and rural area citizen will suffer again.

This action will only benefit the rich. I thought China is a socialist country and they will treat their people equally but now they looked like they are influenced by the US and only take care of the Rich

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