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Reform of benchmark rates will likely lead to effective rate cut in China

Summary:
A shake-up in interest-rate policy in China promises to cut lending rates and should benefit the broad Chinese economy over time.Over the weekend, the People’s Bank of China (PBoC) announced a major change in its benchmark lending interest rate, establishing a closer linkage between banks’ funding costs and their lending rates.Given the notable decline in short-term market interest rates since last year due to the PBoC’s liquidity injections, this likely will lead to a decline in commercial banks’ effective lending rates, and therefore act as the equivalent to a rate cut.This move addresses one of the key problems in the transmission mechanism of China’s monetary policy and should benefit the real economy. The latest changes in interest rate policy is both part of a long-term structural

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A shake-up in interest-rate policy in China promises to cut lending rates and should benefit the broad Chinese economy over time.

Over the weekend, the People’s Bank of China (PBoC) announced a major change in its benchmark lending interest rate, establishing a closer linkage between banks’ funding costs and their lending rates.

Given the notable decline in short-term market interest rates since last year due to the PBoC’s liquidity injections, this likely will lead to a decline in commercial banks’ effective lending rates, and therefore act as the equivalent to a rate cut.

This move addresses one of the key problems in the transmission mechanism of China’s monetary policy and should benefit the real economy. The latest changes in interest rate policy is both part of a long-term structural reform, and also a response to short-term growth headwinds.

However, while we believe the potential reduction in interest rates may benefit the broad economy, the difficulty faced by some sectors is structural in nature and cannot be solved by monetary easing alone.

Given the potential lag in the policy impact, it is likely that the economy will still face strong headwinds for the rest of 2019, meaning that our current GDP forecast of 6.3% for 2019 faces some downside risk. Nonetheless, the latest reform in the PBoC’s interest rate policy should improve the economic outlook for 2020 and beyond.

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About Dong Chen
Dong Chen
Dong Chen is senior Asia economist, Pictet Wealth Management. - Twelve years of working experience in macroeconomic research - Extensive knowledge about asset allocation and multi-asset class portfolios - Rich client-facing experiences with high-net-worth clients across Asia - Rigorous training in economics and comprehensive knowledge about Asian economies and business - Strong analytical skills and solid background in statistical/econometric analysis - Strong communication / presentation skills - Native Mandarin Chinese speaker and fluent in English Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

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