The Chinese central bank suddenly declared a symmetrical cut in interest rates on February 28. Judging from its explanation, the cut intends to consolidate achievements in reducing the business sector's financing cost, preventing the automatic tightening of currency policies resulting from excessively high real interest rates, and to create a "neutral, moderate monetary and financial environment" for economic restructuring and upgrading. The market, however, is more concerned about whether the latest cut means China is officially in the sweeping global game of quantitative easing. Will there be a major shift in China's currency policy?

In the wake of the People's Bank of China's unexpected announcement of an interest cut in November 2014, many international investment banks had predicted Chinese currency would enter a cycle of cutting reserve requirement ratios and interest rates. Following the latest rate cut, international investment banks sound even more exaggerated about their prediction. However, judging from either the bank's monetary policy execution report, or the post-cut explanations, the Chinese central bank doesn't think the rate cuts means any fundamental change in the orientation of monetary policies, not to mention the excessive quantitative easing as in Europe and the U.S. But from the perspective of actual operation, the Chinese central bank's monetary policies do appear in a fix, and their orientation remains very unclear.

First, the abrupt rate cut was meant mainly to solve three problems. 1) The central bank is most concerned about the risk of deflation when international oil prices continued to drop, PPI continued its negative growth, and inflation remained below 1%. Hence when inflation dropped below 1% at home, the central bank had to cut interest rates and prevent automatic tightening of domestic monetary policies. But in fact, considering the current speed of currency increase at home, level of residents' monetary incomes, and the actual CPI level, the Chinese economy remains far from deflation. The central bank's rate cut has more emphasis on expectation management.

2)The biggest problems for the Chinese economy now are the all-round withering of investments and sales in the housing market. This not only results in the downward tendency of domestic economic growth and oversupply in many industries, but may also trigger risks in the domestic financial system and local fund-raising platforms. The most outstanding trouble for the Chinese real estate market at the moment is how to digest stocks and increase demands. The rate cut may play a huge role in lowering home-buyers financing cost. It not only directly reduced their loan-repayment cost, but can reverse expectations in the entire housing market, reigniting a vigorous housing market. Judging from the effects of the new housing credit policies since 2014, however, it won't be easy for the rate cut to fulfill the set goal.

Go to Forum >>0 Comment(s)