Askume, Sept 24 – China’s central bank Governor Pan Gongsheng said on Tuesday the country’s central bank will cut the bank deposit reserve ratio by 50 basis points and further cut key interest rates to support a recovery in prices.
The seven-day repo rate will be cut by 0.2 percentage points to 1.5%, and deposit and other interest rates will also fall, Pan said at a press conference with officials from two other financial regulators.
Market Reaction:
After the news was announced, Chinese stock markets generally rose, and bonds also rose, with the CSI 300 blue-chip index (.CSI300) and the Shanghai Composite Index (.SSEC) each gaining about 1%. 30-year Treasury futures for December delivery hit a record high.
Citation:
Rocky Fan, Economist, Guolian Securities, Shanghai
“In the context of insufficient domestic demand, loose monetary policy is appropriate. The planned RRR cut is in line with expectations, but the interest rate cut is a bit unexpected, because central bank officials have previously stated that the range of interest rate cuts will be limited.”
“Monetary policy easing will certainly boost the economy in multiple ways. Lower LPR and deposit interest rates will boost consumption, which may also be supported by rising asset prices and wealth effects.”
“The RMB exchange rate is expected to weaken after inflation, which to some extent reflects when the current policy will be introduced, as the Fed’s interest rate cut has removed some of the policy constraints. We do not have a strong fiscal policy yet as the monetary policy of local governments is expected to play an important role in maintaining aggregate demand as the government’s underlying debt continues to be paid down.”
Lin Song, Chief Economist, Greater China, ING, Hong Kong
“We believe today’s measures are a step in the right direction, especially since multiple measures were announced simultaneously rather than individual measures with limited impact, as most global central banks currently do, leaving scope for further easing in the coming months.
“The impact of today’s policy package announcement on the market is relatively obvious. The stock market rose after the press conference, and the Hang Seng Index surpassed CSI 300, which may benefit from the announcement of fund subscription. The stock market still faces challenges “The short-term environment is good, but given the current depressed valuations, the mid-to-long term risk-reward looks favorable.
Christopher Ying, Fund Manager, Shanghai Jucheng Asset Management Co., Ltd., Shanghai
“The policy announcement is in line with expectations. Reducing reserve requirements and lowering loan benchmark interest rates will inject more liquidity into the economy. Reducing existing mortgage interest rates can reduce household debt burden and help boost consumption.”
“But to keep the stock market boom going, China needs stronger policies, including a crackdown on fraud and more support from state-backed funds.”
Tony Sycamore, analyst, IG, Sydney
“This is a pretty massive reprieve from China.”
“The impact will be most pronounced on Chinese stocks, but once the Reserve Bank of Australia steps in, I think the Australian dollar will join in as well,” and the Australian dollar could rise to 70 cents by the end of the year.
“You’re probably going to feel the biggest impact on the big mining stocks, particularly BHP Billiton, Fortescue, because they’re dependent on iron ore and the Chinese property market, and I think they’re going to be positive after a tough period in the first nine months of the year, we’ll see how it ends.”
Khoon Goh, Head of Asia Research, ANZ Bank, Singapore
“I think the market reaction has been positive so far, and while some expected stimulus measures will be announced after the press conference, I would say the package so far is probably bigger than the market expected. A series of plans – particularly the package includes new monetary policy tools to support the stock market, so it’s interesting – I think we need to see what the details are.”
“The chairman of the Securities Regulatory Commission has also now announced some measures to support M&A activity and so on. It seems to be a comprehensive package, not just from the central bank but from other financial regulators. And, I think the goal is not just to reduce the cost of borrowing, but also to bring more liquidity into the economy and boost the stock market.”
“Overall, it may support the economy. Whether it is enough to address some of the underlying issues, particularly the lack of confidence in the economy, I think remains to be seen.”
Gary Ng, Senior Economist at Natixis Hong Kong
“This move may be a bit late, but better late than never. With real interest rates high, market sentiment weak and the real estate market not improving, China needs a low-interest rate environment to boost confidence. With a soft Fed, China can do so. The economy needs higher disposable income and corporate income growth to restart, which means “in addition to monetary policy, nuanced supervision may be needed.”
Kelvin Wong, Senior Market Analyst, Oanda, Singapore
“Reactions are now mixed: oil prices have not reacted as positively as stock markets due to a simultaneous rate cut by the People’s Bank of China.”
“People seem to be worried about a ‘liquidity trap’ situation, as there is a mismatch between loose monetary policy and expansionary fiscal policy, and there is currently a liquidity shortage, so excess liquidity is not being used to boost domestic demand. “Therefore, the current weak consumer and business confidence in China is unlikely to change.
