Rate cuts showcase commitment to stability

PBOC moves to curb borrowing costs amid deepening economic cool-down

The People's Bank of China (PBOC) cut the one-year benchmark lending rate by 40 basis points to 5.6 percent and cut the one-year benchmark deposit rate by 25 basis points to 2.75 percent, according to an announcement made Friday by the central bank. What impact will these cuts have on China's slowing economy? The Global Times interviewed three experts to get their views on this issue.

Qiu Yanying, investment officer at China Fortune Securities Co

The PBOC slashed benchmark one-year lending and deposit rates in response to China's economic downturn. The bank's intention here is to stimulate the real economy by lowering enterprises' financing costs and boosting investment demand. Businesses in the real estate, resources, energy and other high liability sectors have much to gain from the central bank's cuts.

The cuts also indicate that the central bank is switching toward a policy approach geared toward fighting deflation, breaking from previous strategies aimed at curbing inflation. As lower rates feed into prices, the central bank's latest move should have a much more substantial impact on the economy than earlier fine-tuning measures.

This could be just the beginning of a rate-cutting cycle. Rates could be lowered again in the near future in order to ensure that monetary policies achieve a lasting impact. Specifically, it may take three to six months for the central bank to assess the benefits of its latest easing measures.

For local equity and real estate markets, lower rates are obviously positive. Still, economic and industry fundamentals will ultimately set the trends in these two markets.

Zhuang Jian, senior economist at Asian Development Bank

China's sustained economic downturn has forced the central bank to carry out its rate cut policy. This universal reduction will be good for enterprises; however, large State-owned firms will likely be the most notable beneficiaries since they are usually the biggest borrowers from commercial banks. Small- and medium-sized enterprises will gain little, in comparison, since they are usually seen by banks as much riskier loan targets.

Still, this rate cut is clearly indicative of the central government's determination to maintain economic stability. The PBC's cuts represent a neutral policy operation, one that will not change the general direction of the central bank's policy orientation. The central bank will likely continue implementing prudent monetary policies.

Whether the central bank carries out another round of rate cuts will depend largely on future economic indicators. More weak data will provide the PBC with further motivation to lower rates.

Xu Bo, research fellow at Bank of Communications in Shanghai

Across-the-board rate cuts will enable enterprises to increase investment and individuals to increase consumption. This will fuel economic growth by raising domestic demand.

Of course, the cuts will be very helpful in dealing with China's economic downturn, since consumer and producer prices have both fallen over past months.

By adjusting prices, the central government is trying to maintain steady economic growth.

The PBOC's cuts are also conducive to interest rate liberalization. They will allow banks to put a higher ceiling on deposit rates … thereby allowing more flexibility and autonomy in terms of what they can offer savers.

On the whole, the cuts are largely neutral and geared toward moderate easing. It is obvious that the central bank is still committed to a prudent monetary policy stance, rather than strong stimulus.

Although the cuts are aimed at lowering financing costs, their actual effect remains to be seen. Commercial banks won't lower their fees without first considering their own economic interests. At the same time, small- and medium-sized enterprises have long struggled to secure financing, so it's hard to say whether they will benefit from the latest cuts.