China cuts interest rates again to support economy
The interest rate and RRR cuts, will ‘help stablise growth, adjust structures and lower social financing costs’, China’s Central bank said.
China’s central bank cut lending rates for the fourth time since November and trimmed the amount of cash that some banks must hold as reserves, stepping up efforts to support an economy that is headed for its poorest performance in a quarter century.
The People’s Bank of China (PBOC) said on its website on Saturday that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.85%, and reducing the one-year benchmark deposit rate by 25 basis points to 2%.
The bank lowered the reserve requirement ratio (RRR) for banks lending to the farm sector and small and medium-sized enterprises by 50 basis points.
The interest rate and RRR cuts, will “help stablise growth, adjust structures and lower social financing costs”, the central bank said. Going forward, the central bank will “continue to implement prudent monetary policy, use various policy tools to strengthen and improve marco-prudential management, optimise policy combinations and create neutral and appropriate monetary and financial environments for economic adjustments and upgrading.”
China last cut interest rates on 10 May, lowering one-year benchmark lending rates by 25 basis points to 5.1%, and lowering one-year benchmark deposit rates by 25 basis points, to 2.25%.
The central bank last cut the reserve requirement ratio for all commercial banks by 100 basis points on 19 April — the deepest single reduction since the depth of the global financial crisis in 2008 — following a 50-basis-point cut in February.
Such system-wide RRR cuts result in large amounts of liquidity flowing back into monetary supply. Targeted cuts, like that announced on Saturday, are not likely to have the same effect.
The central bank has frequently made targeted cuts to spur lending into certain sectors, but they rarely have a significant wider macroeconomic effect, since banks are often reluctant to lend to these sectors amid concerns over collateral and risk.
Weighed down by a property downturn, factory overcapacity and local debt, growth in China’s economy is expected to slow to a quarter- century low of around 7% this year. That is down from 7.4% in 2014, even with expected additional stimulus measures.
While more cuts had been expected as economic growth sputters, Saturday’s changes follow a plunge of 20% in China’s stock markets in the last two weeks.
Despite the drumroll of rate cuts, the real cost of borrowing in China remains stubbornly high, due in part to cooling inflation and banks’ reluctance to pass lower rates on to customers. That has further squeezed manufacturers struggling with tepid demand. REUTERS Indian equities signed off the week on a negative note as benchmark indices Sensex ended 86 points lower as deepening Greece crisis weighed on traders sentiment. The banking stocks were the worst hit and top losers of the day after RBI revealed that banks are likely to see a significant jump in bad loans and that their exposure to State Electricity Boards may turn into non performing assets. Fatigue seems to have set in the markets with indices finding it quite difficult to enter in the positive territory, thereby lacking conviction. Media stocks were surprisingly in a jubilant mood with TV18 Broadcast, Zee Network, Entertainment Network and NDTV all surging positively on the back of report that the government is proposing to increase the foreign direct investment limit in the media sector to attract foreign capital. It looks as if the stock markets are going to be range bound in the next couple of days. Maggi noodles has been a cult brand in the country for the last 30 years and the recent row over safety issues with the product being consequently withdrawn from all stores should have far reaching consequences not only for Nestle India Ltd but for the entire food processing and FMCG companies in general. It has literally landed in a soup. While Maggi noodles accounts for nearly 30% of total company sales, many analysts expect sales to be impacted on other Maggi branded products also. The company will have to ultimately improve the production processes, change the packaging, re formulate the products and communicate better with all agencies and consumers in the future. It is a similar story to what Cadbury did in 2003, wherein legal costs and promotion expenses could take a toll on its margins. It is also a given fact that to save its reputation in the country and its global goodwill, the company would have to spend a considerable amount of money to bring the product back on rails. The financial costs and time to revival have not been spelt out by the Nestle management yet but hopefully they will outline the plan by next month. While recent events have dented the brand image of the company, many brokers and analysts are projecting a volume drop in sales and earnings to take a beating in the next few quarters. With revised earning estimates and volume degrowth, the stock can touch the 5,400 levels or down 10% from the current market price in the next 2-3 months. Despite the near term uncertainty, the Nestle stock is an excellent buy for long term portfolio investors to invest in the stock at regular intervals. Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.