Chinese Banking On Another Rate Cut

China's financial markets are increasingly working on the assumption that the central bank will cut interest rates in the first quarter of this year as inflationary pressures dwindle, analysts said on Friday.

They said another interest rate cut, following two in 1996, would particularly help debt-ridden state-run enterprises claw their way towards profitability and would boost both the stock and treasury bond markets.

Inflation in 1996 was much lower than the target, said a Shanghai-based banker with a major Chinese commercial bank.

This might prompt a cut in bank interest rates shortly, possibly within the first three months of this year.

One of the key factors is the worsening performance ofstate-run enterprises, said a second banker. A rate cut will not solve all their problems but will relieve their debt burden to some extent and help them in terms of cash supply.

Officials with the interest rate department of the central People's Bank of China have declined to comment. Most of China's state enterprises are heavily in debt and are a major burden on both the country's financial system and the government budget.

A rate cut would make credit cheaper for them and reduce their debt servicing payments.

The annual rate for one-year fixed bank deposits is now at 7.47 per cent, down from 9.15 per cent last May. Year-on-year retail price inflation for 1996 is expected to come in at about 6.0 per cent, down dramatically from 14.8 per cent in 1995 and well below the original government target of 10 per cent, the latest official figures show.

There is still potential for a further bank interest rate cut in the short term, especially given the positive market response to the two cuts last year, said Lu Weiming, a state debt trader with China Guotai Securities.

A new cut will also help boost the stock and treasury bill markets, he added. Speculation of another interest rate cut have supported prices on the spot treasury bill market in recent days. Analysts cite the rate cut rumours as one reason for the speedy recovery of China's stock markets following sharp falls in mid-December.

Personal bank deposits have continued to surge, increasing year-on-year by about 30 per cent in 1996 against 1995 to hit around 3.8 trillion yuan ($457.8 billion) by the end of 1996, the analysts said.