'Too little, too late': China interest rate cut spurs call for more moves

China’s surprise interest-rate cut has done little to allay concern over the property and Covid Zero-led slowdown, with economists and state media calling for additional stimulus.
 

In a front-page report Tuesday, the central-bank backed Financial News said Beijing should introduce new pro-growth policies at the appropriate time to keep growth within a reasonable range, citing Wen Bin, chief economist at China Minsheng Bank. The Securities Times said in a separate report the People’s Bank of China’s surprise rate cut may be the first in a series of policies to stabilize growth.

Nomura Holdings Inc.’s Lu Ting, who described Monday’s 10-basis point reduction as “too little, too late,” says even a likely cut next week in the loan prime rate, the de facto benchmark lending rate, won’t do much to boost credit demand. Zhong Zhengsheng of Ping An Securities Co. says that while monetary policy support has reached the magnitude of what was deployed in 2020, more needs to be done given the recovery is weaker than it was back then. Standard Chartered Plc’s Ding Shuang, meanwhile, forecasts another 10-point cut to policy interest rates by the end of October.

“Given the lingering Covid restrictions and fragile economic recovery, we expect the government to continue increasing policy support in the rest of 2022,” said Wang Tao, chief China economist at UBS AG, in a note. 

The derivatives market is signaling stronger expectations for an LPR cut as interest-rate swaps on the nation’s one-year loan prime rate declined after the PBOC’s unexpected rate cut.

The curve is now implying 3.58% for the one-year LPR forward in a one-year horizon, versus 3.66% before the PBOC rate cut, That means room for a cut by about 10 basis points from the current 3.7% level, according to Xing Zhaopeng, a senior strategist at Australian & New Zealand Banking Group Ltd.

Unlike many advanced economies right now, China’s core inflation -- which excludes volatile energy and food prices -- is pretty tame, slowing to merely 0.8% in July as domestic demand remained weak. That gives the PBOC room to take action to fulfill its objectives, which include maintaining a stable currency, supporting growth and preventing financial risks. However, the central bank has been cautious about being too aggressive with easing, which could damage the economy in the long term given its already elevated debt levels.