Schroders Quickview: China cuts rates, but more is needed

We now expect an accelerated pace of monetary easing after the People’s Bank of China delivered another cut to the benchmark lending and deposit rates at the weekend.


Craig Botham

Craig Botham

Emerging Markets Economist

Lending and deposit rates cut

In a move that should prove helpful at the margin, the People’s Bank of China cut both the lending and deposit rates by 25 basis points, to 5.1% and 2.25% respectively.

At the same time the ceiling for the deposit rate was raised to 1.5 times, from 1.3 times previously; banks are able to offer a slightly higher deposit rate than previously, if they wish.

China banks struggling to recoup costs

So far, rate cuts in China have depressed net interest margins at banks, which felt unable to lower deposit rates but were compelled to reduce the rate on existing lending.

As a consequence, the rate on new lending, important for refinancing costs, stayed higher as banks attempted to recoup their diminished margins.

This time, however, listed banks have been reducing their deposit rates as well as their lending rates, suggesting not only less pressure on net interest margins but also a greater marginal impact on debt costs for corporates and households.

Is GDP slowing?

The People’s Bank of China's quarterly report showed that despite the easing measures introduced effective rates in China remain elevated, and the low level of inflation means real effective rates are higher at present than their 2014 average.

Given the apparent shift to more aggressive easing, we now expect an accelerated pace of monetary easing for the rest of 2015, in effect frontloading the stimulus we had expected for 2016.

One implication might be that April’s data is weaker than expected, certainly the trade and PMI data so far would suggest as much. We think GDP growth is likely to slow further in Q2.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.