Credit Agricole Says China Rate Move to Assure 2nd-Half Recovery

Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB, comments on China’s second interest-rate cut in a month.

The People’s Bank of China said today the one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective tomorrow. Banks can offer loans of as much as 30 percent less than benchmark rates, the central bank said on its website.

“The rate cut is in line with our expectation of reduction in the third quarter, but comes sooner in the quarter than we had anticipated and -- in the case of one-year lending -- is larger than the 25 basis points we expected.”

“Combined with further interest rate liberalization (maximum lending rate discount was widened to 30 percent from 20 percent), this amounts to a huge reduction of the cost of lending, which will be a boost to the economy.”

“The aggressive cuts over the past month suggest serious concern about growth slowdown in the second quarter, and may mean that June and second-quarter data will prove really weak, amid a sharp drop in inflation.”

“It seems that policy makers are trying to get ahead of the curve, and today’s move has allowed them to do so. Combined with other stimulus measures introduced in the past several weeks, this will assure growth recovery in the second half.”

“We keep our 8 percent GDP growth forecast for 2012 and believe that this is likely the end of the rate-cutting cycle, with RRR cuts to follow.”

“We expect yuan interest-rate swap rates to fall, and the yuan to rise on the move. However, any gain in the yuan will be limited by a sense that the PBOC may view economic conditions as pretty poor to make such a sudden move.”

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