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Analysts split on impact of China interest rate cut

(Xinhua)
Updated: 2008-11-27 21:22

Analysts on Thursday offered widely diverging views of the impact of an unusually large interest rate cut and a reduction in banks' reserve ratio, which were announced by the People's Bank of China (PBOC, central bank) after the markets closed on Wednesday.

Some said banks would benefit from the reductions, while others took a negative view.

The PBOC cut the benchmark one-year lending rate to 5.58 percent from 6.66 percent and the one-year deposit rate to 2.52 percent from 3.60 percent. These cuts, of 108 basis points each, were the largest since the Asia crisis of the late 90s and took effect on Thursday.

The PBOC also said as of December 5, it would lower the reserve requirement ratio by 1 percentage point at large banks and 2 percentage points at other banks.

Jin Xin, an Everbright Securities analyst, said the rate cuts were definitely good news for banks, whose profitability has been deteriorating. Jin said the move would widen the gap between lending and deposit rates, which is where banks make their money.

For example, about 90 percent of domestic banks' profits come from the rate gap, which had been narrowed by previous asymmetric rate cuts.

As a result, Jin estimated, the net profit of banks would expand by 4.2 percentage points in 2009.

The reduced reserve requirement would also free up more money for banks to lend, pumping around 640 billion yuan (US$91.4 billion) into the system, he added.

Lower lending rates would reduce enterprises' financing costs and boost their investment sentiment, said a report by the Bank of Communications. Cheaper financing would also make borrowing less of a burden for companies and thus would lower banks' bad-loan ratios.

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