On May 10, China cut its benchmark lending rate for the third time since November. The move came just a few days after several brokerages tightened margin requirements, which triggered a 4% decline in Chinese stocks.
At the time, we noted [7] that the PBoC had done something similar not even a month prior, when in April, the central bank slashed the RRR rate for the second time in 2015 after a decision by the CSRC to crackdown on brokerages’ use of umbrella trusts to skirt margin limits caused futures to crash.
Here’s what we said after each of those policy rate cuts: “We wonder then, if Beijing is taking its cues from stocks or from the economy.”
If there were still any doubts about what really matters to Beijing when it comes to setting policy rates, they were answered on Saturday when the PBoC cut both the benchmark rate (for the fourth time in eight months) and the RRR rate (for the third time this year) on the heels of the steep declines suffered by Chinese stocks last week.
Effective tomorrow, the one-year lending rate drops 25bps to 4.85% and some lenders will see RRR fall 50bps. As WSJ notes, this is the first time the PBoC has cute both the benchmark lending rate and the RRR rate on the same day since October of 2008, which should certainly tell you something about how dangerous Beijing thinks the current situation truly is. Here’s WSJ with more [8]:
Analysts saw the PBOC’s moves as a reaction to the massive stock market decline. The near-20% decline in equity values in a matter of days—despite efforts to clamp down on margin lending—threatens to undermine recent progress on restoring growth momentum, said ING economist Tim Condon. “It’s difficult when you have a tiger by the tail. The stock market is clearly fueled by speculative excess,” he said.
It isn’t surprising that China cut interest rates, said HSBC economist Ma Xiaoping, but what was unexpected was that Beijing would put through both a cut in benchmark interest rates and a reduction in certain bank reserves at the same time. This reflects the central bank’s desire to stimulate the economy, fight deflationary pressure and respond to last week’s sharp market decline, she said.
Some analysts went so far as to liken the action by PBOC to that taken by the U.S. Federal Reserve following the infamous “Black Monday”—or Oct. 19, 1987, when stock markets around the world crashed. The Fed at the time encouraged banks to continue to lend to one another on their usual terms, which boosted investor confidence in the central bank’s ability to calm severe market downturns.
“It’s just like what the Fed did in 1987,” said Larry Hu, China economist at Macquarie Group Ltd., a Sydney-based investment bank. “The PBOC is trying to stabilize the market with the unprecedented easing moves.”
“The fact that this is announced now may have something to do with the plunge of the stock market on Friday. This may give the impression that monetary policy easing is somehow aimed at supporting the stock market, which is a pity,” Wang Tao, chief China economist at UBS Group AG told Bloomberg on Saturday.
So although Morgan Stanley — whose "don't buy this dip [9]" call didn't do Chinese investors any favors on Friday — thinks Beijing can't "exert direct control over the stock market", it won't be for lack of trying because given that the Street is calling for several more policy rate cuts before the end of the year, this is likely only the beggining of what may end up being the most transparent attempt to use monetary policy to sustain an unsustainable equity bubble since... well, since the Fed-managed five-year S&P rally.
