China’s surprise rate cut fuels expectations of more easing

BLOOMBERG 

China’s central bank surprised most economists and market participants by cutting a short-term policy interest rate, a sign that officials are increasingly concerned about faltering growth and are stepping up stimulus to boost the recovery.
The People’s Bank of China (PBOC) lowered the seven-day reverse repurchase rate by 10 basis points to 1.9% on Tuesday, the first reduction in the rate since August 2022. That increases the likelihood the central bank will reduce its one-year loan rate on Thursday, with banks expected to lower their lending rates shortly after.
The move underlines heightened concern about a slowdown in growth: recent economic indicators showed inflation remained near zero in May, manufacturing activity contracted and an early rebound in the property market has fizzled. Speculation is growing that the PBOC may cut interest rates even further this year, while Beijing is considering a broad package of stimulus measures.
“Policymakers are finally acknowledging the economic weakness,” said Michelle Lam, Greater China economist at Societe Generale SA. “There should be more interest rate and reserve requirement ratio cuts in the second half of 2023.”
Goldman Sachs Group Inc economists forecast a 25 basis-point cut to the reserve requirement ratio for lenders — which will free up more money for banks to boost lending — in the third quarter. Another cut to the ratio or policy rates could happen in the fourth quarter depending on the economy’s performance, they said.
A gauge of Chinese stocks listed in Hong Kong was up 0.4% at the mid-day break, boosted by tech shares. Property stocks — which rallied after the cut, pared more of the gains, with a gauge of developers up just 0.3%.
While rate cuts may help sentiment in the short term, economists say more needs to be done to boost confidence for businesses to invest. Borrowing demand remains weak, and rapid growth in money supply alongside sluggish private investment means monetary easing alone won’t do much to stimulate the economy. “A rate cut is not enough to lift the market,” said Steven Leung, executive director at UOB Kay Hian. “Market needs to see more policy support, both monetary and fiscal, before turning around bearish sentiment on China’s economic outlook.”
The timing of the move suggests the PBOC may be trying to get “ahead of the curve” and the US Federal Reserve’s upcoming policy meeting “to mitigate the rate cut impact on the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.
PBOC Governor Yi Gang vowed to step up “counter-cyclical adjustments,” a shift in language that some analysts said signalled more easing. He also pledged to “make all efforts to support the real economy” as the recovery in demand has lagged that of supply.