1st simultaneous rate, RRR cuts in 7 yrs
China's decision to cut both interest rates and banks' reserve requirements ratio (RRR), effective Sunday, will help stabilize the economy and send a positive signal to the capital and property markets, experts said.
The People's Bank of China (PBC), or central bank, slashed both its one-year deposit and lending rates by 0.25 percentage points. It also lowered the RRR, the amount of reserves banks are required to hold, by 0.5 percentage points for banks with sizable lending to rural areas, agriculture as well as small and micro businesses.
In a statement on Saturday, the central bank said that the cuts were aimed at lowering borrowing costs and stabilizing growth.
"Stabilizing growth is the fundamental reason behind the rare move of cutting interests rates and the RRR at the same time," Zhou Jingtong, a senior analyst at the Bank of China, told the Global Times Sunday.
The last time the central bank cut both interest rates and the RRR on the same day was in December 2008, when China's GDP growth slowed to 6.8 percent in the fourth quarter of that year from 9 percent the previous quarter amid the global financial crisis.
"Although some economic indicators for May have showed signs of stabilizing, the Chinese economy still faces downward pressure, and social financing costs are still high," Zhou said.
The cuts lowered deposit and lending rates to 2 percent and 4.85 percent, respectively.
The central bank said it chose to make a targeted RRR cut instead of a universal RRR cut because the banking system still enjoys ample liquidity following an overall RRR cut in April.
"The targeted RRR cut also reflects the efforts of central authorities to adjust the economic structure," Zhou said.
The targeted RRR cut is expected to inject 470 billion yuan ($75.7 billion) into the economy, China Merchants Securities estimates.
"This is not surprising given that real activity indicators remain weak in April and May, and show that China's economy may have missed 7 percent growth in the second quarter," Liu Ligang, chief China economist at ANZ Banking Group, wrote in a note.
The National Bureau of Statistics is scheduled to release second-quarter and half-year GDP figures in July. The Chinese Academy of Social Sciences (CASS), a government think tank, said on Friday it projects that China's GDP growth will slow to 6.93 percent in the second quarter from 7 percent in the first quarter.
CASS said in a report that a batch of government support policies will gradually take effect starting the third quarter and help the Chinese economy achieve its annual growth target of around 7 percent.
The rates and targeted RRR cuts will also help stabilize the equity market, analysts said.
China's A-shares market saw its biggest one-day drop in seven years on Friday, with the benchmark Shanghai Composite Index dropping by 7.4 percent and the smaller Shenzhen Component Index also falling by 8.24 percent.
"The move will help regain investor confidence, and avoid systemic financial risks brought by heavy selloffs," said Zhu Zhenxin, an analyst at Minsheng Securities. "The market will remain bullish but at a slower pace."
Compared to uncertainties in the stock market, the housing market will benefit more from the central bank's move, Yan Yuejin, research director of Shanghai-based E-house China R&D Institute, told the Global Times Sunday.
He said the latest interest rate cuts mean a home-buyer who takes out a 20-year loan of 1 million yuan will be paying 141 yuan less every month.
"The cuts will also lower the funding costs of property developers, stimulate home sales and lower the inventory of unsold houses," Yan said.
China's housing market has showed signs of recovery this year after a downturn in 2014, backed by several interest rates cuts and support measures.
Analysts said they expect more monetary easing measures in the second half of the year.
Liu said he believes the central bank will cut the RRR by another 1 percentage point before the end of the year if capital outflow matches the first quarter's pace.
China's inflation rate is likely to stay at 1.5 percent in 2015, so there's still room to lower interest rates in the second half, analysts at China Merchants Securities said.
