A rate cut intended to support smaller banks—without refuelling the stockmarkets' mania
By S.R. | SHANGHAI
CHINESE investors jokingly call the central bank "central mama". They thanked her for dispensing a bit of love over the weekend by trimming interest rates and reducing some lenders’ required reserves. The rate cut, her fourth since November, took one-year benchmark lending rates to 4.85%, a record low for China.
Punters hope this will save the stockmarket from further carnage. Having led the world for much of the past year, China’s equities have been in free fall over the past two weeks, tumbling 19%. Had the central bank done nothing, the rout would have been sure to deepen. Was it a sign of “desperation”? Though some characterised it as such, China’s easing, on a closer read, is more calibrated than that.
The cut to required reserve ratios (RRR) was mild by recent standards. On April 20th, the People’s Bank of China slashed RRR for all banks by 1%, freeing up more cash for them to lend. That was equivalent to its injecting upwards of 1.3 trillion yuan ($210 billion) in the financial system. This time, it cut RRR only for smaller banks, such as rural commercial lenders, and by just half a percentage point. Depending on implementation, that will add about 100 billion yuan to the system, a far cry from an economy-wide cut.
What’s more, the central bank went out of its way to emphasise that it did not see a problem with current liquidity conditions. It said the level of cash in the financial system was “quite abundant” at the moment, noting that banks have 3 trillion yuan in excess reserves and that overnight lending rates are just about 1%, near historic lows. The RRR cut thus looks more like a gesture to reassure the market than a panicked loosening.
China's wild stockmarket, in charts
As for the rate cut, it is important to remember that interest rates by themselves play a relatively limited role in Chinese monetary policy because regulators still control the quantity of credit in the financial system through informal lending quotas. Rate cuts thus help reduce the cost of credit for borrowers, but they do not support credit growth, as is typically the case in developed economies. Indeed, the central bank said its main reason for cutting rates was to lower funding costs for companies. Low inflation means that real lending rates have remained stubbornly high, making the case for a cut.
And it would be misleading to describe the central bank’s easing as simply a knee-jerk reaction to the stockmarket sell-off. While the central bank certainly does not want to see stocks crash, what had been a raging bull market until two weeks ago had been making its work difficult. When data earlier in June showed that investment was still sluggish, the central bank held off from additional easing, apparently wary of stoking the speculative excess in equities. The stockmarket correction gave it more room in which to act. And with the limited nature of its RRR cut, the impression is that it wants to support the economy without refuelling the stock mania. Even central mama's love has its limits.
