Interest Rate Cut Lowers Government Bond Yields and Bank Guarantee Bill Discount Rates... Additional Cuts in Q1 Also Discussed
Some Chinese Provinces Set This Year's Growth Target Above 6%, Showing Confidence in Economic Stimulus
[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank of China, has lowered the Loan Prime Rate (LPR), the benchmark interest rate, by 0.1 percentage points.
On the 20th, the People's Bank of China announced that it would cut the 1-year LPR from the previous 3.8% to 3.7%, a 0.1 percentage point reduction. The People's Bank of China had lowered the 1-year LPR by 0.05 percentage points a month ago. This means a total cut of 0.15 percentage points within a month.
The People's Bank of China also announced a 0.05 percentage point cut in the 5-year LPR to 4.6%. The central bank significantly lowered short-term funding rates to inject liquidity into the market.
This rate cut was anticipated. On the 18th, Liu Guochang, Deputy Governor of the People's Bank of China, said, "Monetary policy must be sufficient, precise, and forward-looking," and hinted at a rate cut by stating, "We will open the monetary policy toolbox further to maintain economic stability."
Sun Guofeng, Director of the Monetary Policy Department of the People's Bank of China, implied the rate cut by saying, "The LPR is determined comprehensively considering bank capital, risk premiums, and market supply and demand. We will reflect market conditions to lower corporate loan rates."
The market also firmly expected the rate cut. However, the expected cut range was between 0.15 and 0.20 percentage points. The market anticipates that after this 0.1 percentage point cut, additional cuts may be implemented in the first quarter depending on market conditions.
Bill Discount Rates Plummet↓ Market Reacts First
The rate cut reflects the Chinese government's intention to inject money and stimulate the economy. The market is responding. Since the beginning of this month, discounting of bank-guaranteed bills has already started. Bank-guaranteed bills are promissory notes guaranteed by banks and have the second-highest credit rating after bonds issued by the Chinese government.
Although there are some differences depending on the bank, the discount rate for bank-guaranteed bills has reached 30 basis points this month. With additional rate cuts anticipated, banks are rushing to discount bills. Many bill holders are also eager to cash out before the discount rate widens further. This creates a structure where cash inevitably circulates.
Chinese government bond yields are also falling. As of the 19th, the 3-month government bond yield is 2.35% per annum, down 8 basis points from the previous day. The 6-month and 1-year yields have dropped 7 basis points and 5 basis points respectively, recording 2.45% and 2.60%. Falling bond yields mean bond prices are rising.
A source in Beijing analyzed, "The falling government bond yields and bank-guaranteed bill discount rates indicate an expectation that benchmark interest rates will continue to decline. Since the Chinese government has clearly expressed its intention to inject liquidity, interest rates are likely to keep falling."
Some Chinese Provinces Confident in Over 6% Growth This Year
Chinese President Xi Jinping diagnosed at the Central Economic Work Conference held in December last year that the Chinese economy faces three pressures: demand contraction, supply shocks, and weakened expectations. This means the Chinese economy is not in good shape. After the economic work conference, the Chinese government instructed local governments to issue special bonds and invest in infrastructure.
Despite concerns about economic contraction, some Chinese provinces have set their economic growth targets for this year between 6% and 8%.
The state-run Global Times reported that ahead of the upcoming March Two Sessions (National People's Congress and Chinese People's Political Consultative Conference), nine provinces have set their GDP targets at 6% or higher this year.
The media reported that the Tibet Autonomous Region's target is "about 8%," Anhui Province and Jiangxi Province have set targets of "over 7%," and Hebei Province, Sichuan Province, and Henan Province have set targets of "over 6%." The media also noted that due to China's economic stimulus policies, the Chinese economic growth rate could reach the 6% range instead of the market-expected 5% range.
Zhou Maohua, an economist at China Guangda Bank, said, "Despite the real estate market slowdown last year, domestic demand has expanded since the third quarter of last year," adding, "The central government's policy support will empower local governments."
Dong Dongxin, Director of the Finance and Securities Research Institute at Wuhan University of Science and Technology, said, "Supply chain instability caused by U.S. sanctions could pose challenges to China's manufacturing industry," but also forecasted, "The central government's implementation of infrastructure projects will give momentum to China's economy this year."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
