Simon English: Bold but risky as China opt to cut its rates
Friday 08 June 2012
Outlook Inscrutable bunch, these Chinese. So goes the (possibly racist) cliché. But yesterday's dramatic action by the People's Bank of China rather suggests that this particular branch of the Chinese government may not be quite the poker-playing ace it is often portrayed to be.
The PBoC's cut in interest rates, by 25 basis points to 6.31 per cent, would have been big enough news on its own: it was the first such action by the central bank since 2008. This was accompanied by a simultaneous cut, to 3.25 per cent, in deposit rates.
It suggests the PBoC is rather more worried about the downside risks to growth – the notion of a "hard landing" – than it has let on. However, the PBoC has also increased the extent to which China's commercial banks may offer savers a premium over its main deposit rate and the extent to which they may offer borrowers a discount to its main lending rate.
It is an exceptionally bold move that marks a further step in the liberalisation of China's banking market. But it is not without risks. It is likely to intensify competition between China's commercial banks and, in the process, depress their margins.
And that, in the current climate, suggests the PBoC is indeed worried about the extent to which China's economy is susceptible to a sharp slowdown in activity. Not much poker-playing in any of that.
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