China Economic Update – December 2014

In late November, the People’s Bank of China (PBoC) surprised markets with cuts to benchmark interest rates. These changes were the first in over two years – the PBoC had held rates stable since early July 2012.

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China’s surprise interest rate cuts – easing debt burden or targeting growth?

In late November, the People’s Bank of China (PBoC) surprised markets with cuts to benchmark interest rates. These changes were the first in over two years – the PBoC had held rates stable since early July 2012. There are competing forces that make the rate outlook uncertain – first is the extent to which Chinese authorities wish to arrest the current slowdown in the economy and the second is the broader goal of controlling growth in debt.

What were the policy changes?

On the lending side, the benchmark one year lending rate was cut by 40 basis points to 5.6%. The actual rates that banks lend to their customers are largely deregulated – following changes introduced in July 2013.

The benchmark one year deposit rate was lowered by 25 basis points to 2.75%. The impact of this change is somewhat diluted by widening the permitted ceiling above the benchmark to 20% (from 10% previously). This meant that the maximum deposit rate remained unchanged at 3.3%.

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