China Easing Seen as Just the Beginning by Ammunition-Rich PBOC
Comment of the Day

February 04 2015

Commentary by David Fuller

China Easing Seen as Just the Beginning by Ammunition-Rich PBOC

(Bloomberg) -- China’s latest move in the global monetary-easing game may be just the start.

Economists from Deutsche Bank AG, Bank of America Corp. and Nomura Holdings Inc. are among those forecasting more cuts to reserve requirements and benchmark interest rates after the People’s Bank of China said Wednesday it’s lowering lenders’ reserve ratio by 50 basis points.

Unlike its biggest peers, the PBOC has plenty of ammunition. Even after the reduction, China’s biggest banks will still have to keep 19.5 percent of deposits locked up. The one-year lending rate is 5.6 percent -- a long way from the zero bound that forced the Federal Reserve, Bank of Japan and now the European Central Bank into quantitative easing.

“China is an economy that has the capacity” to act, said Karen Ward, a global economist at HSBC Holdings Plc in London. In addition to being far from zero interest rates, the nation has a relatively low level of sovereign debt, Ward said.

Capital outflows, depreciation pressure on the yuan, deflation risks and a deepening economic slowdown are among reasons analysts cited for Wednesday’s reserve-ratio reduction, which adds capacity for banks to lend. It’s a combination that may need more than one pill to fix.

“The impact on the real economy is positive but it is not enough to stabilize the economy,” as demand for loans may fail to match the expanded supply, said Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong. “A more proactive fiscal policy is necessary to boost final demand.”

He forecasts another 50 basis-point reduction in the reserve ratio next quarter, along with interest-rate cuts in March and the April-June period. Without looser fiscal policies, there are “downside risks” to Deutsche Bank’s forecast of 7 percent gross domestic product growth in 2015, he said. One basis point is equal to 0.01 percentage point.

David Fuller's view

I believe this rate cut announcement came after China’s stock market had closed on Thursday, so it will be interesting to see how the market responds on Friday.  From rate cuts to QE, monetary stimulus is one of the most bullish influences on stock markets.  

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