China Rate-Cut Chatter Becomes Louder as Growth Risks Gather

(Bloomberg) -- Economists betting the People’s Bank of China will cut interest rates in the near future are still in the minority camp, but their voice is becoming louder.

• Analysts from Guotai Junan Securities Co., Citic Securities Co. and China Evergrande Group are seeing a rising chance the central bank will cut its benchmark rates in the near future, with some saying reductions could come in early 2019

Key Insights

• China is likely to "lower benchmark deposit and lending interest rates to stabilize growth and support private small firms," as previous easing measures haven’t passed onto companies and individuals, Ming Ming, a former PBOC official and head of fixed income research at Citic Securities Co. in Beijing, wrote in a report
• While policy will still focus on tax cuts, credit enhancement and fiscal stimulus in the short term, the possibility for interest rates cuts to become a "policy in reserve" is rising in 2019, according to Hua Changchun, global chief economist at Guotai Junan Securities Co. in Shenzhen. He said targeted rate cuts for small firms could come at the end of the year, while bigger cuts could come in the second quarter of 2019
• China has kept its benchmark one-year lending rate unchanged at 4.35 percent since October 2015, as policy makers focused on defusing debt-related risks. A reduction would have a broad-based easing impact on the economy while also putting additional downward pressure on the yuan
• A majority of economists still view rate reductions as a second-choice move, compared with tax cuts and further reductions in required reserve ratios, according to a Bloomberg survey conducted this month
• The PBOC omitted a previously-used phrase that it was "firmly against flood-style strong stimulus" in the policy outlook section in its third-quarter monetary policy report published Friday, a shift from the 2Q report

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net;Malcolm Scott at mscott23@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board