China's surprise rate cut fuels hopes for more easing
Whilethe move is expected to improve the sentiment in the property sector, mainland banks will see an erosion of profit margins
The mainland's surprise move to reduce interest rates for the first time in more than two years has fired up expectations of further cuts aimed at shoring up an economy that is on track to record its weakest annual growth since 1990.
Beijing's monetary easing, announced on Friday, chimed in with other stimulatory moves in the euro zone and Japan. Global markets jumped in response to the policy measures in the key economic regions.
The announcement signalled a "policy shift towards more aggressive monetary easing", said Zhu Haibin, the chief China economist at JP Morgan Chase. "This reflects government concern about near-term growth."
The People's Bank of China cut the one-year benchmark lending rate by 40 basis points to 5.6 per cent as part of stepped-up efforts to support small and medium-sized enterprises that are struggling to repay loans and access credit amid the downturn.
It also lowered its one-year benchmark deposit rate by 25 basis points to 2.75 per cent.
Analysts have hailed the measures as helping the property sector, a key driver for the broader economy, find its bottom and spurring buying sentiment.
However, the PBOC's move would squeeze banks' margins, said the Industrial and Commercial Bank of China.
Mainland developers, which have been trading at low price-earnings ratios, would draw strong buying interest, analysts said yesterday.
"This is very positive news," said Lee Wee Liat, the head of property research at BNP Paribas Securities (Asia). "It will not be a one-off rate cut, but a start of an interest rate cut cycle."
Home prices have been turning south amid weakening demand and a high inventory. Last month, prices of new homes fell month on month in 69 of the 70 major cities monitored by the National Bureau of Statistics, unchanged from September. Year on year, prices dropped in 67 cities, against 58 in September.
David Hong, the head of research at data provider China Real Estate Information Corp, said: "The housing sector would benefit as end users will be encouraged to enter the market amid falling mortgage costs."
But the sooner-than-expected rate cut might indicate that the economic outlook was worse than the market expected, Hong said in a report released on Saturday.
The economic slowdown deepened last month, jeopardising the government's growth goal of about 7.5 per cent for the year. Economic expansion slipped to 7.3 per cent for the third quarter.
Factory production rose 7.7 per cent from a year earlier, the second-weakest pace since 2009.
Reflecting the concerns of the banking sector, ICBC chairman Jiang Jianqing told a forum in Beijing on Saturday that the move by the central bank would "inevitably squeeze the profit margins of banks, and the narrower margin is a long-term trend". The erosion of profit margins would hurt banks' ability to grow, he added.
The PBOC's actions will also be felt on the yuan. Analysts say it could signal the end of a rally in the currency since May, especially if officials follow up with a cut to reserve requirement ratios.
The PBOC's easing came weeks after the Bank of Japan boosted its asset purchases and hours after European Central Bank president Mario Draghi vowed to drive faster inflation and broaden its asset-buying programme if needed.
