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China: Another rate cut from PBoC

Mon, Dec 22 2008, 13:52 GMT
by Danske Research Team

Danske Bank A/S

The Peoples Bank of China (PBoC) today cut its leading 1 year benchmark lending and deposit interest rates by 27bp to 5.21% and 2.25% respectively. This was the fifth rate cut in less than three months (see chart 1). In addition, the reserve requirement ratio (RRR) for smaller commercial banks was cut by 50 bp to 13.5% and the RRR for major banks was cut by 50 bp to 15.5%. In light of the very weak November numbers released for the Chinese economy, the rate cut does not come as a surprise. On the contrary, the size of the cut was probably less than expected; we expected PBoC to cut by 54 bp before year end.

Outlook: We have not changed our outlook for monetary policy in China, despite the rate cut being less than expected. The near term outlook for the Chinese economy is very weak with GDP growth possibly slowing to 6% y/y in Q1 09. For China to achieve some kind of soft landing it is crucial that the real estate sector turns around. It will take some time before the impact from fiscal easing starts to kick in. Hence, monetary easing should be frontloaded as much as possible in order to support the real estate sector when it most needs it. Thus we expect the picture for monetary policy in China to continue to be aggressive interest rate and RRR cuts. We expect the leading 1Y benchmark lending rate to be cut to just below 4% by the end of Q1 09.

We have not changed our view on CNY either. As seen in Chart 3 and Chart 4 some of the recent deprecia-tion speculation has abated. However, a slight depreciation of CNY is still discounted into 12M USD NDF. We expect CNY to trade broadly unchanged against USD on a 3M-6M horizon and appreciate to 6.60 on a 12M horizon.

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Published on  Mon, Dec 22 2008, 13:54 GMT