China's central bank cut interest rates starting Monday in the face of inflationary pressure and economic headwinds, but experts say the step should not be interpreted as the start of quantitative easing (QE).
The People's Bank of China (PBOC) on Sunday announced it will cut the benchmark deposit and loan interest rates by 25 basis points. After the move, the third rate cut in six months, the one-year deposit rate stands at 2.25 percent, and the one-year lending rate at 5.1 percent.
China's consumer price index (CPI) edged up to 1.5 percent in April, but came in below market expectations. The producer price index (PPI), a measure of costs for goods at the factory gate and a leading indicator of CPI movements, plunged 4.6 percent year on year in April, marking the 38th straight month of declines and suggesting anemic market demand.
China's subdued inflation came after recent economic data, including export figures, pointed to weakening economic momentum and provided leeway for policy makers to ease monetary policies and bolster economic growth. But market speculation abounds as to whether China will join the QE club.
China is confronted with global economic uncertainties and mounting domestic downside pressure, and the interest rate cut was rolled out at an appropriate time to stop the slowdown, said Wen Bin, chief analyst with China Minsheng Bank.
"Monetary easing can provide support to investment and consumption as well as reduce borrowing costs for companies, because it takes time for China to create new growth engines," he added.
Wen's view was echoed by other experts. Lian Ping, chief economist of the Bank of Communications, said the rate cut can help reduce financing costs for households and businesses amid deflationary risk and lackluster data, such as the new manufacturing sector investment figures.
China's economy now faces serious downward pressure and it is necessary to cut actual interest rates and stabilize investment growth by reducing nominal interest rates, said Ma Jun, chief economist with the PBOC's research bureau.
The rate cuts should not be read as the Chinese version of QE, said Ma, adding that QE is a set of unconventional policy measures used when policy rates are close to zero and the real economy faces recession. Ma stressed that this is not what is happening in China as the central bank still has many conventional tools to pump liquidity into the economy.
The economy expanded 7 percent in the first quarter -- the lowest quarterly growth since 2009, but outpacing most major economies. The slowdown came amid government efforts to make the economic growth model more sustainable.
The latest PBOC policy report for the first quarter also ruled out the need to use QE to inject liquidity into the market, saying China has ample room to use various monetary tools to effectively manage and supply liquidity.
QE is a monetary policy featuring accelerated expansion of the central bank's balance sheet while policy rates approach zero. Some advanced economies such as the United States and Japan have used QE to stimulate lending and spending activities.
Speculation that China is using QE is at odds with the fact that the country still has maneuvering room in its monetary policy toolkit, stressed Lu Lei, head of PBOC's research bureau.
Since November 2014, the PBOC has resorted to interest rate cuts, slashing the reserve requirement ratio (RRR) -- the amount of cash banks must park at the central bank -- as well as other measures to inject liquidity into the market.
China's stock market on Monday saw a strong rally after the interest rate cuts, with the benchmark Shanghai Composite Index surging 3.04 percent to 4,333.58 points. Property, furniture, home appliances and high-tech companies were among the strongest gainers, as interest rate cuts are seen as a boon to real estate.
Major banks underperformed compared to other sectors, with shares of the Industrial and Commercial Bank of China (ICBC), the biggest bank by market capitalization, up by 0.97 percent to 5.2 yuan per share (0.85 U.S. dollar), as the rate cuts will weigh on banks' profit margins, analysts said.
China on Wednesday is scheduled to publish a string of key economic figures including retail sales. Economists, including Wen Bin with China Minsheng Bank, have predicted that more monetary easing is in store if the upcoming data fall short of forecasts.
