China Cuts Rates; Reserve Ratio Lowered by 0.5 Points (FXI) (GXC)

(Updated - August 25, 2015 6:24 AM EDT)

The People's Bank of China (PBOC) cut its reserve ratio by 0.5 percentage points, 1-year benchmark lending rate by 25 basis points to 4.6 percent, and its 1-year benchmark lending rate was also cut by 25 basis points to 1.75 percent. The PBOC said the economy is still facing downward pressure and that working to maintain stability is difficult.

UPDATE - The PBOC also issued the following commentary (translated):

1, what the introduction of the combination of measures to cut interest rates drop quasi main consideration is?

A: At present, China's economic growth downward pressure still exists, steady growth, adjusting structure, promoting reform, benefit people's livelihood and risk prevention task is still very arduous, the global financial market has recently appeared greater volatility, the need for more flexible use of monetary policy tools to create a favorable environment for monetary and financial adjustment of economic structure and economic stable and healthy development.

The lower the benchmark interest rate loans and deposits, the main purpose is to continue to play a good role in guiding the benchmark interest rate, reducing the social cost of financing to promote and support the sustainable and healthy development of the real economy. Since November 2014, the People's Bank has lowered four times the benchmark interest rate loans and deposits, guide financial institutions lending rates continued to decline. July 2015, the weighted average interest rate of loans from financial institutions was 5.97%, the first decline since 2011 to a level of financing high social cost 6% less effective mitigation. Although the past two months, CPI rose slightly, but the main impact of structural factors such as rising pork prices significantly affected the overall price level is still at historically low levels, but also for re-use price tools to further drive down the cost of providing social financing conditions. For this purpose, the approval of the State Council, the People's Bank of China decided to further cut the benchmark interest rate loans and deposits, lending rates of financial institutions and to promote all kinds of market interest rates continue downward, the consolidation of macro-control policy effects preliminary.

The lower the deposit reserve ratio, mainly based on changes in the banking system liquidity, adequate long-term liquidity, in order to maintain adequate liquidity and reasonable, and promote stable and healthy economic development.People's Bank recently perfected the exchange rate of the RMB against the US dollar quotation mechanism, and spreads over the central parity and the market exchange rate has been corrected, the foreign exchange market in the process of reaching equilibrium, can also cause fluctuations in liquidity, requires a corresponding remedy the resulting liquidity gap and reduce the deposit reserve ratio may play such a role. In addition, the county additionally reduce rural commercial banks, rural cooperative banks, rural credit cooperatives, rural banks and financial leasing companies, auto finance companies RRR, related primarily to guide financial institutions to further increase the "three rural "Small and micro enterprises and the expansion of consumer support.

2, the combination of interest rate cuts What is the background and significance of the release of more than one year deposit rate floating ceiling is? Why should we continue to keep the upper limit of the floating interest rate deposits and demand deposits within a year of change?

A: According to the State Council's strategic plan, in recent years, the People's Bank to accelerate market-oriented interest rate reform, and made important progress. Currently, in addition to the deposit interest rate controls have been fully liberalized, the deposit rate floating ceiling has been expanded to 1.5 times the benchmark interest rate for businesses and individuals formal certificates of deposit issued, the market interest rate pricing mechanism and continuously improve self-discipline, the central bank interest rates gradually regulatory capacity enhance the smooth introduction of the deposit insurance system, further promote market-oriented reform of interest rate conditions are more mature. Meanwhile, China's current overall price level is low, the total amount of ample liquidity in the banking system, relatively small upward pressure on market interest rates, but also to promote market-oriented interest rate reform to provide a better macroeconomic environment and the time window.

In this case, put the reform in the regulation being combined with interest rate cuts and further promote the interest rate market-oriented reforms, release of more than one year deposit rate floating ceiling, marking the market-oriented reform of interest rates has taken an important step forward. As financial institutions to further widen the independent pricing space, is conducive to the promotion of independent pricing capability of financial institutions to improve and accelerate the transformation of the business model, improve financial services, but also help promote the fund price more realistically reflect the market supply and demand, give full play to the market decisive role, and further optimize the allocation of resources, promoting economic structure adjustment and transformation and upgrading, create favorable conditions for healthy and sustainable economic and financial development.

Remain within the one-year deposit and demand deposit interest rate floating ceiling unchanged, reflecting the "first long-term, short-term," the basic order of progressive liberalization of deposit interest rate ceiling of reform ideas, but also with the international common practice consistent. Judging from past experience, this order to promote market-oriented interest rate reform, help foster and exercise independent pricing capability of financial institutions, to lay a more solid foundation for the full realization of the ultimate interest rate market; but also conducive to the stability of financial institutions deposit interest rate and overall financing costs, promote lower social financing costs, to maintain the sustained and healthy economic development has a positive meaning.

3, release the one-year deposit interest rate above the upper limit of the floating, how to guide scientific and rational pricing of financial institutions?

A: The release of more than a year after the floating deposit rate ceiling, the PBC will continue to improve related measures, further scientific and rational pricing guide financial institutions to maintain a fair and orderly market competition order. First, we continue to publish benchmark deposit rate by existing maturities. Further play the guiding role of the benchmark rate, providing an important reference for the one-year deposit rate over pricing. Second is to improve the regulation of interest rates and the transmission mechanism. Further improve the central bank interest rate management system, enhance the ability to control interest rates. Strengthen financial market benchmark interest rate to cultivate and improve the market interest rate system, improving monetary policy transmission efficiency. Third is to play the role of industry self-regulation. Guide market interest rate pricing discipline mechanism to further play an important role in a good industry pricing discipline, in accordance with the principles of compliance with laws and regulations, incentives and constraints of both, for a better interest rate pricing financial institutions to continue to give more priority to market pricing and product innovation right, expand the main issue certificates of deposit and interbank deposit investment range; with the necessary self-restraint on the deposit rates beyond a reasonable level, disturb the market order financial institutions.

4, recent central bank action to provide liquidity What?

A: The central bank to provide liquidity more channels and tools, in addition to the RRR, the recent expansion of the central bank has also implemented a reverse repo, the medium-term lending to facilitate (MLF), supplementary mortgage loans (PSL) and so increase market liquidity and loanable funds initiatives. Since August, the cumulative carry out reverse repo operations put in 565 billion yuan of liquidity to carry out the central treasury cash management operations of commercial bank deposits put in 60 billion yuan of liquidity. August 19 six months to carry out the operation of MLF 110 billion yuan, 3.35% interest rate, at the same time increase market liquidity and guide financial institutions to increase small and micro enterprises and the "three rural" and other key areas of the national economy and weak links support. To continue to provide long-term stability, adequate sources of funding for the development costs of the financial support shed change by PSL, 7 PSL end balance of 846.4 billion yuan, an increase of 463.3 billion yuan over the beginning. The timely play of price leverage, as well as adjustments to adapt keep the benchmark lending rate, since the funds rate three times this year cut PSL to increase the shantytowns, support, promote lower financing costs. In addition, the central bank continues through agriculture, support small refinancing and rediscount support financial institutions to increase the "three rural" small and micro enterprises credit. The end of July, the balance of agriculture lending 213.9 billion yuan, an increase of 26.2 billion yuan over the previous year; supporting small balance lending 62.5 billion yuan, an increase of 25.4 billion yuan over the previous year; rediscount balance of 127.2 billion yuan over the previous year increased 11.8 billion yuan.

Next, the central bank will continue to closely monitor changes in liquidity, comprehensive use of various tools to regulate the flow of appropriate combinations to maintain adequate liquidity and reasonable and stable operation of the money market, to guide steady moderate growth of money and credit, and promote stable and healthy economic development.

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