(22 July 2024 – China) The People’s Bank of China (PBoC) has made its first major move since signalling a shift in monetary policy framework last month to foster growth.
The PBoC made its first rate cut since February, cutting the seven-day reverse repurchase (repo) rate ten basis points (bps) from 1.8 percent to 1.7 percent while loan prime rates were also cut ten bps in a boost to support economic growth.
Chinese commercial banks’ net interest margins (NIMs) remain anchored at record lows while non-performing loans (NPLs) have been expanding rapidly. Rate cuts will likely add to the pressure on Chinese banks profitability with a broader focus on financial markets stability resulting from the highly indebted Chinese property sector.
“We believe the PBoC held back from monetary easing in the past few months in large part due to its priority to maintain currency stability amid a strong dollar trend. The recent dovish developments in the US and the slight softening of the dollar over the past month may have created a suitable window for the PBOC to cut rates” commented ING Chief Economist, Greater China, Lynn Song.
“In a vacuum, the PBoC lowering short-term rates should add to depreciation pressure in the near term, although the actual impact will depend on various factors, including the daily RMB fixings and the transmission effect of the 7-day reverse repo cut on market rates, US-side developments, and capital flow developments. Looking ahead, even if the PBoC continues with gradual easing, it is likely that once the US starts its rate cut cycle, yield spreads should gradually move to favour a stronger RMB as the scale of US cuts is expected to be larger than in China.”