First Insights-China:More fiscal stimulus expected after PBoC’s rate and RRR cuts

The People’s Bank of China (PBoC) has cut its benchmark rate by 25bp and lowered the reserve requirement ratio (RRR) for banks by 50bp, effective 26 August 2015. After this rate cut, the benchmark 1-year lending rate will be 4.6% and the 1-year deposit rate will be 1.75%. It has also implemented an additional 50bp RRR cut for rural commercial/cooperative banks, rural credit cooperatives, and village and township banks and an additional 300bp RRR cut for financial leasing and auto financing companies.

    This move also carries forward interest rate liberalisation by lifting the 1.5x ceiling for time deposits with tenors over one year.

    The timing of RRR cut is in line with our forecast while the interest rate cut is earlier than we expected, but as we have highlighted yesterday, policy easing could be stepped up more amid the current equity market turmoil and recent capital outflows following the CNY fixing mechanism reform (see China: RMB depreciation does not reduce the likelihood of further policy easing…, 24 August 2015). The move reflects that the government is willing to undertake accommodative policy to cope with weak growth momentum and contain possible macro risks associated with equity selloffs.

    Impact on the economy 。

    We estimate the RRR cut injects about RMB670bn of liquidity into the banking system, which, together with liquidity injections via open market operations and the medium-term lending facility, partly sterilise the liquidity tightening arising from recent capital outflows, possibly resulting in a slight decline in M2 growth in August.

    Lower interest rates could reduce financing costs and boost fixed-asset investment, and hence aggregate demand with a one-to-two quarter time lag. With structural oversupply in the property sector and the overcapacity problem in the manufacturing sector, we believe this will mainly boost infrastructure investment demand.

    We maintain our GDP growth forecast of 6.9% y-o-y in Q3, as the stronger-than-expected easing offsets downside risk to our forecast, and this positive effect will be felt more in Q4 2015 or Q1 2016 owing to the time lag.