Beijing has lost its nerve on growth. The first interest rate cut in over two years is a strong signal that the economy is no longer within the planners' comfort zone, despite politicians' recent talk of new normals and stable conditions. Reducing the cost of borrowing will buy time, and may help full-year growth get close to the official target of 7.5 per cent. Yet it will leave China's long-suffering savers worse off, and big adjustments will be required.
Cutting benchmark rates is dramatic because the People's Bank of China had other options it could have tried first. True, the injection of 770 billion yuan ($126 billion) into the banking system over the past two months had almost no effect. But lenders still have over a fifth of their deposits locked up in central bank reserves that could have been freed up to stimulate the economy with new credit. Going for a direct method makes a bigger statement, though, and reflects that banks no longer always do what they're told.
The main effect of the rate cut will be to make life easier for borrowers who are struggling to service their interest payments. Bad debts at banks have been growing but still almost certainly understate the real level of distress. In return for booking fewer non-performing loans, they get pain of a different kind: a reduction in the guaranteed spread between loans and deposits of around 0.4 per cent. For comparison, that would have shaved just under five per cent off the biggest five banks' net interest income in the most recent quarter.
Meanwhile, the move may breathe some life into a zombified property sector. Sales of housing have fallen every month this year, and fell three percent in October year-on-year, despite relaxation of mortgage rules. Home loan costs will now fall further along with benchmark rates.
Where does this leave Chinese citizens? At first glance, they're no worse off. While the central bank has cut the one-year deposit rate, banks can in practice still offer the 3.3 per cent they gave out before. But that rate remains capped. And the returns that regular Chinese consumers were getting from alternative investments like money market funds and over-the-counter wealth management products will now come down. In other words, the most helpful reform of all - putting savers ahead of borrowers - will have to wait.
Cutting benchmark rates is dramatic because the People's Bank of China had other options it could have tried first. True, the injection of 770 billion yuan ($126 billion) into the banking system over the past two months had almost no effect. But lenders still have over a fifth of their deposits locked up in central bank reserves that could have been freed up to stimulate the economy with new credit. Going for a direct method makes a bigger statement, though, and reflects that banks no longer always do what they're told.
The main effect of the rate cut will be to make life easier for borrowers who are struggling to service their interest payments. Bad debts at banks have been growing but still almost certainly understate the real level of distress. In return for booking fewer non-performing loans, they get pain of a different kind: a reduction in the guaranteed spread between loans and deposits of around 0.4 per cent. For comparison, that would have shaved just under five per cent off the biggest five banks' net interest income in the most recent quarter.
Meanwhile, the move may breathe some life into a zombified property sector. Sales of housing have fallen every month this year, and fell three percent in October year-on-year, despite relaxation of mortgage rules. Home loan costs will now fall further along with benchmark rates.
Where does this leave Chinese citizens? At first glance, they're no worse off. While the central bank has cut the one-year deposit rate, banks can in practice still offer the 3.3 per cent they gave out before. But that rate remains capped. And the returns that regular Chinese consumers were getting from alternative investments like money market funds and over-the-counter wealth management products will now come down. In other words, the most helpful reform of all - putting savers ahead of borrowers - will have to wait.