In a surprise announcement today, the People's Bank of China
declared multiple rate changes designed to stimulate the Chinese
economy (
FXI
,
quote
). Because of the nature of the measures, investors should
interpret the cuts to Chinese interest rates positively.
[caption id="attachment_52787" align="alignright" width="300"
caption="The People's Bank of China headquarters"]
[/caption]
While somewhat confusing, the announcement of a cut
in Chinese interest rates is another sign China's government
is willing to face growth challenges head on.
Pundits expected the People's Bank Of China only to cut the
Reserve Ratio Requirement (RRR), since the central bank
already cut interest rates last month. However in a surprise move,
Chinese leadership opted to cut
both the benchmark one year lending rate by 0.31 percentage points
and the benchmark deposit rate by 0.25 percentage points.
The cuts to Chinese interest rates are considered to
be a more bullish move by the Chinese government than simply
reducing the RRR, as it is likely to have a more profound effect on
the economy. As Li Xunlei, chief economist
for Haitong Securities, indicated in
flash comments on his microblog
: "The PBOC aims to stimulate domestic
consumption while transferring the banks' profits to the real
economy."
Such a move also indicates Chinese banks still have considerable
policy flexibility. Enacting these cuts demonstrates the Chinese
have the ability to further bolster the economy via policy
initiatives. We can also assume the People's Bank of China does not
consider inflationary pressures to be particularly problematic
going forward.
The cuts to Chinese interest rates mean the central bank
has lowered the floor of the lending rate to 0.7x the base lending
rate, effectively allowing Chinese to borrow at a much lower
rate.
The move could squeeze the banks. But the Chinese financial
sector is only trading at 5.4x forward earnings, so most of the bad
news is probably already baked in. Considering that FXI is heavily
weighted towards financials, the
BRICs are trading at such low valuations
, and that the ETF is down almost 8% over the past three months,
this could be a short-term buying opportunity.
