PBOC Cuts Interest Rates
Executive Summary
On November 21, the People’s Bank of China (PBOC) announced it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent. It lowered one-year benchmark deposit rates by 25 basis points to 2.75 percent. This is the first time central bank changed its monetary policy in two years. The current over-tightened monetary policy was loosened and we are optimistic that the cuts will make the targeted yearly 7.5% GDP growth rate achievable.
Fixed asset investment sped up slightly and temporarily in October, rising 14.4% y/y in real terms. But industrial output rose jut 7.7% y/y, the third month in a row in which the rate was below 8%. Most raw material production shrank in October, declining from already weakened growth.
Retail sales of consumer goods rose 11.5% y/y in nominal terms in October, down 0.4 pps from Q3, and 1.8 pps from October 2013. CPI rose 1.6% y/y, flat on September. Given the lagged effect of declining M1 growth, we expect CPI rise to keep declining, and further in H1 2015, if monetary policy is left unchanged. The ex-factory price index of industrial products fell -2.2% y/y, and PPI fell -2.6% y/y, down 0.4 and 0.6 pps from September – and negative for the 32nd month in a row.
Exports rose a comfortable 11.6% y/y in October, comparable to Q3. Imports recovered, and rose 3.3 pp, or 4.6% y/y, in October. But the main contributing factor in recovery was trade import processing, not improvement of domestic demand. As the Chinese RMB is appreciating against the dollar, we expect the imports situation to improve but hard for exports to be still robust.
Financial indicator increases slowed further in October, and monetary and financial variables contracted. M2 was up just 12.6% y/y by month’s end – to its lowest level since 1990. M1 increased 3.2% y/y, far below any low levels since 1990. M0 increased 3.8% y/y, likewise a record low. Yet we aren’t as pessimistic as our peers about this year’s GDP forecast, not only because of the interest rate cuts but also because the government has fiscal expansion potential. For example, in the recent month, the National Development and Reform Commission, in an unprecedented move, rapidly approved 21 infrastructure investment projects, totaling about 700 billion RMB.
The Ministry of Commerce announced that for the first 10 months of 2014, China’s outward direct investment (ODI) reached $81.18 billion -- close to the value of all FDI in China. The Ministry of Commerce forecasts that ODI in 2014 will reach about $120 billion. If that comes true, this would be the first year ever that Chinese ODI would outstrip FDI -- and this trend would be likely continue in 2015, and beyond. China is becoming a net supplier of global capital, and is redefining its role in the world economy, by playing a larger contributing role.
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