05/13/2015
China / Insights
China cut interest rates on Sunday, the third time since November 2014. Why does this matter, and who will benefit?
1. What did the PBOC do?
The People’s Bank of China (PBOC) cut the 1-year lending and deposit rates by 25 basis points over the weekend. (Read This is the third cut in six months. It also lifted the deposit rate ceiling to 1.5x of the benchmark rate, from 1.3x previously. The PBOC is likely to fully abolish the rate ceiling next, the final stage of interest rate liberalisation.
2. Was this a surprise?
The rate cut was well-expected. In fact, the 25bps rate cut was slightly lower than market expectations for 50bps
3. Are more cuts on the cards?
DBS expects the PBOC to cut rates by at least another 25bps, and to lower the amount of reserves that banks are required to hold (the required reserve ratio, or RRR) by 2.5% for the rest of the year.
4. Why did the PBOC cut?
Because Beijing recognises that the macro environment is weak. This latest PBOC move will help increase liquidity, and should be market positive. (Read more about China’s new normal.)
5. So how does it work?
The gradual reduction in interest rates is partially meant to arrest the slowdown of the economy. The cuts work by lowering the direct interest cost burden on debt-ridden entities, more so than to stimulate lending by banks. After all, the prime cause of the economic slowdown is the impact of the anti-corruption drive. (Read more here.)
6. And the impact on investments?
The rate cut will likely further reduce interbank rates and Wealth Management Product (WMP) yields, and this could divert consumer’s savings towards equity investments.
7. Do Chinese equities still look good?
DBS remains positive on Chinese equities. Markets will be volatile and there could be periods of consolidation and correction. But we should see Chinese equity markets higher this year. Valuations are still modest relative to the Chinese market’s own historical range, and compared to other markets. Year-end targets":" HSI":" 33,500; HSCEI":" 18,400 (Read the DBS outlook for May, and Hong Kong and China’s hyper returns.)
8. Who will benefit?
Brokerages, insurance, China property, railways, environmental BOT (build-operate-transfer) operators and expressways
