Citibank: Macroscopic risks in the near future predict that the interest rate in

Citibank: Macroscopic risks in the near future predict that the interest rate in China would be further cut

Source: 2008-12-04 12:46

 

[Shihua Financial Information] Citibank holds the opinion that the economic growth in China is still confronted with unfavorable risks in the near future, so it is essential to further cut the interest rate.

In Citibank's Observation on China's economy released on 22^nd December, it is essential for the Chinese government to further cut interest rates. The People's Bank of China proclaimed to cut 27 basis points on key interest rates and 50 basis points on the rate of reserve against deposit, but the decrease ranges are smaller than expected and it has been just four weeks since last substantial interest cut of 108 basis points at the end of November. Since the summer of 2008, the downward regulation on the ruling rate of interest in China has added up to 216 basis points. So, Citibank thinks that the Chinese government could give good reason for slowing down the implementation of loose monetary policies, but seeing that grave challenges to economy still exist, more loose monetary policies would be adopted at the beginning of 2009.

Citibank thinks that interest rate cut would do favor to the banking. The interest rate of term deposits is cut by 27 basis points, while the lending rate for six months and three years are only cut by 18 basis points. The gap expansion between deposits and lending might be purposed to protect profits of banks, in particular, before the government demands a great deal of loans to implement fiscal projects. Hence, the further interest rate cut in term deposits is limited (currently, the interest rate of deposit for one year is 2.25%). Also, to ensure banking security, it is estimated that the Chinese government would not dramatically cut the rate of reserve against deposit again. So, in Citibank's opinion, the interest rate policies might have reached the bottom line.

Citibank also thinks that at this critical junction, the bottom line of monetary policies might be the best of available plans. The policies carried out by the Chinese government recently haven't imposed great impact on the macroscopic environment. The effect of oil price cut, new policies on real estate and the implementation of the initial 100 billion financial investments still wait for time to testify. Some hold that the inventory curtailment that frustrates production might come to an end. Moreover, the financial investment might dramatically revitalize the industry at the beginning of 2009. Although these might come true, the fatigued and weak demands for consumption might be neglected in these viewpoints.

Recent data on retail sales manifest that the demands for consumption generally stumble into increasing fatigue. In addition, the monthly inflation continuously drops, while the pressure of unemployment tends to increase. So, the trade prospect in 2009 might dim along with poorer export; commodity prices might remain stable (or a bit rebound), but foreign trade could no longer bring about tremendous balance. Moreover, many of key trade partners of China have run into recession. All of these would result in downward risks to China's economic growth in the near future. Hence, Citibank thinks that it is essential for the Chinese government to further cut the interest rate, though the range might be smaller.

As predicted by Citibank, to the mid of 2009, the lending rate for one year would drop from the recent 5.31% to 4%, the interest rate of term deposits would drop below 1% or so, and the rate of reserve against deposit would drop between 11% to 12%.