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1. Event:
In the evening of December 22, the People’s Bank of China announced:
1) To lower benchmark one-year deposit & loan rates by 0.27ppt and rates of other maturities respectively
from December 23, 2008; meanwhile, to down-regulate reloan and rediscount rates.
2) To bring down RMB deposit reserve ratio of financial institutions by 0.5ppt from December 25, 2008.
From a domestic view, latest data indicates that economic slowdown is being further accelerated and
inflation is evolving to deflation, with the task of ensuring economic growth more and more severe. In
November, import & export data saw negative growth for the first time and generating capacity fell by 9.6%;
moreover, industrial added value acceleration sharply slipped to 5.4%, setting new low on monthly record.
Meanwhile, inflation has faded away quietly, yet deflation is getting closer; PPI and CPI both have declined
below 3%. In addition, money supply substantially slows down; in spite of rebound in credit growth,
commercial banks are still cautious about lending.
From an international view, central banks of every economy have sharply cut interest rates again and
economic stimulus packages are continuously rolled out. Global economy was particularly cold in this winter.
2) Small-ranged cut in interest rate and deposit reserve ratio conforms to the “flexible and cautious” principle
and accumulative force of loose monetary policy is considerable. According to our calculation, since material
flip-flop on money happened on September 15 (moderately relaxed monetary policy pitched later), People’s
Bank of China cumulatively lowered RMB benchmark deposit & loan interest rates (one year) by 1.89% and
2.16ppt (interest tax exemption of savings deposit included, Table 1) and RMB deposit reserve ratio of large
and small financial institutions by 2.5ppt (Table 2) and 4.5ppt.
From the effects, benchmark lending rate cut can reduce loan capital cost and improve production &
management and profitability of enterprises; moreover, it can release financial pressure of real estate
Report Excerpt
enterprises and the burden of purchasers to some extent, which can help inspire investment and lead
housing consumption. Meanwhile, benchmark deposit rate down-regulation can ensure “deposit & loan
interest margin” space of commercial banks and consider the interest margin earning; also, it can encourage
lending impulse and convert savings to consumption to expand domestic demand. Deposit reserve ratio cut
of financial institutions and cash flow ease can increase fluidity of commercial banks to strengthen their
loans issuance ability.
As we judge, current economy faces more severe challenge than those of 1998 and 1999. At that time,
benchmark interest rates of deposit & loan (one year) were lowered from high point 10.98% to low 1.98%
(20% interest tax rate of savings deposits included) in February 2002 and 5.31% respectively, with large
periodic rate cut range; based on this point, bottom benchmark interest rates of deposit & loan shall be
0.63% and 3.69%. Thus, we adjust the forecast in 2009 macro annual report; interest rate cut space will be
further enlarged to 0.90% and 3.93%; however, we maintain the prediction that the bottom will be reached in
the first half 2009 unchanged.
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Report Excerpt
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