No One Is Talking About The Chinese Move That Is Even More Important Than The Rate Cut

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Photo: Guang Niu/Getty Images

This morning, the People’s Bank of China announced a surprise interest rate cut for the first time since 2008.More important and much less talked about is China’s decision to allow commercial banks to offer up to 10 per cent premium to the benchmark deposit rate (compared to 0 per cent previously), and the up to 20 per cent discount to the lending rates (compared to 10 per cent previously), according to Societe Generale analyst Wei Yao.

Deposit growth has continued to slow despite the steady increase in the real deposit rate i.e. the money paid out in interest by a bank on cash deposits and other investment accounts. While this could pressure banks, the deposit rate increase would give the Chinese higher returns and help increase spending. From Yao:

“This was the reason that we didn’t expect any cut in benchmark deposit rates. Neither did we think the PBoC would take such a big leap of faith to liberalizing deposit rates – even just partially – this year, as it is a game changer for China’s financial market, seemingly presenting a point of no return.

Such a combination should introduce more competition among banks but may compress their profit margins, which is quite risky in the midst of an economic downturn. Therefore, the further liberalization is actually more significant than the cut.”

Yao also says that irrespective of the effectiveness of this move it is a strong policy signal. Given the room for more accommodative monetary policy and Beijing’s focus on structural reforms the probability of an 4 trillion renminbi stimulus like 2008-2009 is low.

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