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3rd Round Rate Cuts by Central Bank within Half a Year Benefits Bulk Commodities like Metals

Zhongdu Silver 2015-5-12

The central bank announced that it will cut the benchmark lending rate and deposit rate by 25 basis points from May 11, 2015. This is the 3rd time the central bank cut interest rates in the last six months, after the interest rates cuts were conducted in November 2014 and March 2015, respectively. In line with the deposit rate liberalization, the upper limit of floating band of deposit rates for financial institutions is increased to 1.5 times the benchmark from the previous 1.3 times. Analysts believed that this interest cut is a normal policy adjustment specifically introduced by the central bank in response to the macro-economic situation and continuous potential deflation risk.

Since the beginning of this year, China saw softness in several economic indicators ; GDP of the 1st quarter barely reached 7% and CPI and PPI index remained in low levels. Analysts reckoned that under the background of continuing economic downward pressure and increasing deflation risk, the intention of the government to stabilize growth through loose monetary policy becomes more and more obvious.

“The import and export data publicized on 8 May both showed negative growth, and the CPI and PPI index released on 9 May reflected the sluggish growth of China's economy and further deflation risk; the central bank cuts rate at a good timing to effectively drive down financing costs of corporate entities and stimulate economic recovery.” said Jiang Xingchun, the manager of research and development center of Guoyuan Futures Co., Ltd., “This interest rate cut would benefit market in two aspects, the first is to make a clear signal on loose monetary policy in order to give more confidence to the market , and the second is to strengthen efforts to stabilize growth which is beneficial to the recovery of real estate industry and consumption increase.

Guo Tianyong, professor of Central University of Finance and Economics, stated that the previous two interest cuts had kept nominal interest rate at a low level, however, given the continuous drop in price level and the fact that the actual interest rate remained high, the central bank introduces the 3rd round of interest rate cuts within half a year with the intention to further decrease financing costs and ward off the downward trend of economy and it is an important measure to stabilize growth.

Analysts believed that interest rate cut benefits stock market in general, and more attention shall be given to the five sectors of real estate, banking, non-silver finance, nonferrous metals and coal. Wang Jun, dean of Founder CIFCO Futures Research Institute, is of the view that successive actions of the central bank would bring positive impacts to commodity futures and stock index futures, and commodities might keep rebound segment by segment. Jiang Xingchun also said that bulk commodities would be stimulated by the positive impacts, and the consumption is expected to increase, especially demand for industrial products such as screw-thread steel will be stimulated by the real estate industry which also benefits from the rates cut. Given the risk that institutional investors might reduce holdings of growth enterprise market (GEM), futures index experienced relatively large rebound on last Friday; under such backdrop, the market expected that the positive impacts may be digested in advance and the futures index will record high opening quotation and low closing quotation on Monday.

Guo Tianyong stressed that China's economy is still facing relatively huge downward pressure, however, the government shall mainly resort to regular currency policy tools instead of the western way of introducing quantitative monetary policies and injecting excessive liquidity into the economy. He opined that the “new normal” economy requires cultivating internal growth impetus through reform and structure adjustment, instead of being dominated by external momentum from monetary policy.

Chang Jian, the chief China economist of Barclay, said that there is still no clear indicator showing the stabilization of China's economy, and the central bank would carry out another interest rate cuts in the coming months; interest rate cut on Sunday “just offset the recent downward risk”.

Unexpected interest rate cut of the People’s Bank of China in last November shocked the market, and studies by Bloomberg News showed that Chang Jian, the chief China economist of Barclay in Hong Kong, was the only economist who then predicted that the People’s Bank of China would reduce interests in September to November.

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