This Morning's Chinese Rate Cuts Mean Upcoming Economic Data Could Be Ugly (FXI, EWH)

This morning China announced that it was cutting its 1-year benchmark lending rate by 31 basis points to 6 percent and 1 year benchmark deposit rate by 25 basis points to 3 percent.

But what are the larger implications of this? And what will the central bank be watching for in the coming weeks?

Ting Lu, China economist for Bank of America-Merrill Lynch writes that while the rate cut itself is good news to markets, investors might be concerned about whether June and second quarter data will come in worse than expected.

Lu explains just who this rate cut helps:?

"The biggest beneficiary is those big [state-owned enterprises] with high leverage. Impact on [small and medium-sized enterprises] is small. Good for local govts with high leverage. Existing mortgage borrowers benefit too. Based on today?s PBoC memo, first time home buyers could get better discount on rates (maximum is 30% discount to benchmark rate), so we think today?s rate cut is good for developers too."

For now Lu continues to expect an "imminent 50 basis point reserve requirement ratio (RRR) cut. The government is expected to be more aggressive in its attempts to kickstart the pace of new and existing projects, especially social housing. The government is also unlikely to step up more tightening measures on the property sector.

Societe Generale's Klaus Baader writes that the latest rate cut, which come less that a month after the June rate cut, shows "behavior that is reminiscent of 2008".

While Baader expects more easing by way of RRR cuts he doesn't expect more interest rate cuts. And further easing will be contingent on data, especially bank lending data:

"Clearly, the rapid succession of easing moves is a signal of substantial concern about the state of the Chinese economy. Coming shortly ahead of key data releases, it suggests that the latest batch of economic indicators is likely to be weak. That would include inflation, which we expect to have dropped to 2.2% yoy in June from 3.0% in May, which would go a long way to allay policy makers concern about inflation pressures.

The aim of these latest moves will to an important degree be to put pressure on banks to increase lending to the economy as a whole, and especially to corporate. The PBoC is likely to now watch how banks react to the latest moves, and especially if they are willing to accept a margin squeeze. On the opposite side, the PBoC will want to see if credit demand, which has been weak of late, as indicated by recent surveys, will revive in the context of lower rates."

Don't Miss: Why China's Deposit Rate Cuts Are So Important >

Source: http://feedproxy.google.com/~r/TheMoneyGame/~3/JzubZPdz7yY/implications-of-chinese-rate-cuts-2012-7

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