PBoC Cuts Rates; Deposit Ceiling Gone

With the economy slowing, the PBoC cut interest rates and reserve requirements (RRR) again today. Some headlines call it a "surprise" and it was out of the ordinary in terms of timing in the week, a Friday evening, but the economy is weakening and it there will be more easing to come.

Bloomberg: China Cuts Interest Rates, Reserve Ratio to Counter Slowdown
The one-year lending rate will drop to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were cut by 50 basis points, with an extra 50 basis point reduction for some institutions. The PBOC also scrapped a deposit-rate ceiling, a further step in the liberalization of interest rates.
The scrapping of the deposit ceiling is good news, but the rate cut is a BB fired at a charging elephant.

PBoC Statement: 央行有关负责人就降息降准以及放开存款利率上限答记者问. There should be an English version out soon, but the Google translate gives the gist.

1. What is the main consideration the introduction of the interest rate cuts and RRR measures are?

A: At present, domestic and international situation is still complex, China's economic growth are still some downward pressure on the need to continue the flexible use of monetary policy tools to strengthen preset tuning, to create a favorable monetary and financial environment for economic structural adjustment and economic stable and healthy development.

The lower deposit and lending rates, mainly based on changes in overall prices, to maintain a reasonable level of real interest rates, and promote social financing to reduce costs, increase financial support for the real economy efforts. The central bank's benchmark interest rate adjustments to observe the changes in the CPI general principal, but also due reference to the GDP deflator. In most cases, change the trend CPI and GDP deflator is consistent. But in the current special circumstances, influenced by international commodity prices and a sharp decline in domestic investment, industrial demand is slowing down and other factors, CPI and GDP deflator trend has been divided. September CPI rose 1.6 percent in the first three quarters of GDP deflator was -0.3%, in addition to September PPI fell 5.9%. Taken together, the overall level of China's current low prices, so there is some room for reducing the benchmark interest rate.

The lower the deposit reserve ratio, mainly based on possible changes in liquidity in the banking system made presetting. Recent foreign exchange market expectations stabilized, the impact of foreign exchange liquidity substantially neutral. Factors affecting future changes in foreign exchange is still some uncertainty, coupled with centralized warehousing October tax will be reduced liquidity in the banking system, and therefore need to release part of the reserve by lowering standards, in order to maintain reasonable liquidity in the banking system abundant.
2. What the directional RRR specific content?

A: In the previous six directional RRR, press the home computing total of more than 97% of the number of financial institutions enjoy a directional RRR policy, achieved a certain effect in stimulating agriculture support small financial institutions. According to policy implementation, the People's Bank adjust and optimize the orientation RRR standards, additional standards-compliant financial institutions to reduce the deposit reserve ratio by 0.5 percentage points. Adjusted pre-standard directional drop consideration of a case where the main financial institutions in line with macro-prudential management, the situation is "three rural" or small micro-enterprise loans and the stock proportion of incremental, but also considering the "three rural" and small micro-enterprise loans total, etc., will help guide financial institutions to adjust and optimize the credit structure, increase the "three rural" and support for small and micro enterprises, and promote more funds into the real economy, the weak link. Next, the PBC will continue to improve directional RRR assessment mechanism, optimization assessment standards and strengthen positive incentives, continue to increase national economic weaknesses in key areas and support efforts.

3. What is the background and significance of the liberalization of deposit interest rate ceiling is?

A: At present, China's economic development in the old industrial and convert the kinetic energy continue the critical period, in order to more fully play a decisive role in the market to optimize the allocation of resources, promote economic growth mode transformation, interest rates need to accelerate market-oriented reforms. Meanwhile, in recent years, scientific and technological progress, development of the Internet and the continued integration of finance, a number of innovative financial products developed rapidly triage the increasingly evident effects of deposit, deposit interest rates tend to weaken the effect of regulation on accelerating interest rate market Reform made an urgent request. In addition, domestic and international practice have shown that the best deposit interest rate market-oriented reforms in the price down, the rate cut cycle is carried out, it is not easy because of deregulation and a significant increase in such lending and deposit pricing. At present, China's price increases continued to remain low, the market showed a downward trend in interest rates, but also for the liberalization of deposit interest rate ceiling to provide a better external environment and the time window.

Liberalization of deposit interest rate ceiling of market conditions has matured. Currently, the asset side of financial institutions has been completely market-oriented pricing, market-oriented pricing extent of the liability side has reached more than 90%. PBOC, demand deposits, and within only one year (including one year) deposit rate 1.5 times the benchmark rate retention cap management, from the liberalization of interest rates controls only a step away. From the actual situation, independent pricing capability of financial institutions has been significantly improved, more rational deposit pricing behavior in general, has ordered the formation of a layered, differentiated competitive deposit pricing pattern. Major commercial banks to release the deposit rate ceiling has been fully anticipated and done a lot of preparatory work, "boots" landing is conducive to further stabilize expectations. In addition, certificates of deposit and interbank certificates of deposit issued orderly trading, market interest rate pricing mechanism and continuously improve self-discipline, the smooth introduction of the deposit insurance system, but also for the liberalization of deposit interest rate ceiling laid a solid foundation.

In this context, the PBC decided to seize the favorable opportunity, blending into the reform in the regulation, combined with monetary policy adjustments, the commercial banks, rural cooperative financial institutions, rural banks, finance companies and other financial institutions are no longer set the deposit rate floating limit. This indicates that China's basic interest rate controls liberalized financial market players in accordance with market principles negotiated autonomous financial products pricing. This is conducive to encourage financial institutions to accelerate the transformation of business model to enhance the level of financial services; also help improve the market interest rate system, improve capital utilization efficiency, and promote the development of direct financing and financial market structure optimization; more conducive to improve the interest rate determined by the market supply and demand formation mechanism, the interest rate lever to optimize the allocation of resources to play a role in the full release of the vitality of the market, for steady growth, adjusting the structure, benefit people's livelihood has important significance.

4, after the basic interest rate controls liberalized, China's interest rate formation mechanism and regulation will be like?

A: The removal of administrative restrictions on floating interest rates, the interest rate does not mean that the central bank no longer be managed, but the interest rate will be more reliance on market-based regulation of the transmission mechanism of monetary policy tools and. From this perspective, the interest rate reform will enter a new phase, the core is to establish a sound market interest rates appropriate to the formation and regulation mechanism, improve the effectiveness of the central bank to control the market interest rates.

First, the guidance and control of market interest rates by the central bank interest rate policy guidance system. International experience, China is actively building and improving the central bank policy rate system, the central bank in order to guide and control, including market benchmark interest rate and yield curve, including the entire market interest rates, in order to achieve monetary policy objectives. For short-term rates, the PBOC will strengthen the use of short-term repo rate and standing borrowing convenience (SLF) interest rates, in order to nurture and guide the formation of short-term market interest rates. For long-term interest rates, the PBOC will play refinancing and borrowing to facilitate the medium-term (MLF), supplementary mortgage loans (PSL) tools such as the regulation of long-term liquidity and medium-term policy interest rate features, guide and stabilize the long-term market interest rates.

Second, the various financial markets in order to market the benchmark interest rate and yield curve as a benchmark for interest rate pricing. Money market, bond market and other market interest rates may Interbank Offered Rate (Shibor), short-term repo rate, yields, etc. to determine in accordance with inter-Shanghai Bank, and the formation of the market yield curve. Credit markets may reference pricing benchmarks include lending base rate (LPR), Shibor, yield curve, etc., during the transitional period, the central bank announced the benchmark lending rate also still play a benchmark role. Various financial product has its price reference point on the reference interest rate plus the formation of differentiated, customer-oriented interest rate system, but the original aim, all around changes in market benchmark interest rate.

Third, to further rationalize the interest rate transmission mechanism. On the basis of the market to improve the central bank's benchmark interest rate policy rate system, nurture, the PBC will further rationalize and then from the central bank policy rate to various market benchmark interest rate, from the money market to the bond market, the credit market, and then to other market interest rates as well as entities economic transmission channels. Meanwhile, financial markets products through rich, promote related price reform, increasing market interest rate conduction efficiency.

5, in order to ensure the smooth progress of the reform of the interest rate market, the central bank at a reasonable pricing to guide financial institutions of science What measures?

A: In order to ensure the realization of monetary policy and interest rate reform targets, in the aforementioned interest rate formation mechanism and on the basis of the regulation, the PBC will take comprehensive measures to guide financial institutions to scientific and reasonable pricing, to maintain fair pricing order. First, a period of time the central bank will continue to publish benchmark deposit and lending rates. Before the market supply and demand determine the interest rate formation mechanism is fully established, the central bank announced the deposit and lending rates still provide important reference for financial institutions interest rate pricing. Second, financial institutions play a good role of industry self-rate pricing. Guide market interest rate pricing discipline mechanism, in accordance with the principle of combining incentives and constraints, priority given to financial institutions a better interest rate pricing more product innovation, as well as lending base rate (LPR) and other market interest rates quoted qualifications, and high interest Lanchu, disrupt market order financial institutions to be self-constraint. Third, to further improve the macro-prudential management. The deposit and lending rates of financial institutions included in the pricing behavior of prudent macroeconomic management, and research through the use of differentiated reserve ratio, refinancing and rediscount and deposit insurance premium rate differential and other tools to guide financial institutions to scientific and reasonable pricing. Fourth, we continue to urge banking institutions to further train well, "Strength", and constantly enhance the ability of independent pricing and risk management, to better adapt to the market interest rate environment.

6. What is the overall consideration of monetary policy is the next step?

A: At present monetary policy is still robust overall. Next, monetary policy will maintain continuity and stability, strengthening the preset tuning for steady economic growth and continue to upgrade and create an appropriately tight monetary conditions. To grasp control efforts, both to prevent the decline in aggregate demand inertia occurred during the restructuring, but also to prevent an excessive rise in the debt ratio resulting in rapid increase leverage. The central bank will continue to closely monitor the economic and price situation changes, comprehensive use of various tools in combination, to maintain adequate liquidity and reasonable and stable operation of the money market, to guide monetary credit and social financing scale steady moderate growth, promote stable and healthy economic development.

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