China's central bank People's Bank of China has lowered its one-year lending rate by 25 basis points to 4.6 percent effective August 26. It also cuts deposit rate by 25 bps to 1.75 percent effective August 26, while cutting banks' reserve requirement ratio by 50 bps effective September 6.
Additionally, there has been a 300 basis points reserve requirement cut for financial and auto leasing companies and a 50 bps cut in reserve requirement for rural commercial and rural corporate banks.
The Chinese central bank has also removed the upward cap on deposits of more than one-year tenor. Also, the ceiling on fixed deposit with more than 1-year maturity has been removed.
But Shaun Rein, managing director, China Market Research Group, says a 50 bps reserve ratio cut will not stop the market bleeding. People were expecting this cut on Sunday, instead it came today. "So now in fact it appears as though the government is reacting to the market as opposed to guiding the market," he told CNBC-TV18.This is the fifth time since November that China has lowered its interest rates.The move comes on the back of the Shanghai Composite index losing 7.6 percent on Tuesday - at its lowest since December 2014.Vishnu Varathan, Senior Economist & Head, Economics, Markets & Strategy, Mizuho Bank, says: "If you are looking at it very myopically, just from the stock market point of view, it is not enough because the last time we had cuts and the last time we sponged some of the bleed it came back again and from an economic perspective real interest rates are much higher now in China for two reasons, one is inflation is low, the other reason of course is that the actual lending rates now in China are at a higher premium to the lending rate than they used to be."The Indian markets, meanwhile, didn't get a chance to react to China lowering its benchmark rates. But Jagdish Malkani, Member BSE and NSE feels there will be more of an uptick tomorrow. "May be there were some rumblings of all this which is why Asia also turned and Europe opened strong and the Dow Futures are up."However, Manish Kabra of Bank of America Meryll Lynch, says, though the kneejerk reaction will be positive, from a longer-term perspective it is still more about developed markets and emerging markets story. "If you hold the view that dollar is going to remain strong, then developed markets are still the place."
Below is the verbatim transcript of Shaun Rein, Vishnu Varathan, Jagdish Malkani & Manish Kabra's interview with Latha Venkatesh, Sonia Shenoy and Nayantara Rai on CNBC-TV18.
Latha: What is the answer? Will this do to stem the market bleeding as it were?
Rein: I am not sure that a cut of 50 basis points for the reserve ratio is actually going to stem the market bleeding. Part of the reason why the markets dropped so much yesterday and today is people were expecting the cut on Sunday. That is when the government usually makes these sort of moves. So, by delaying until Wednesday, it seems that the government is panicking more than actually coming up with a smart well-thought out process. So I am actually quite critical of what some of the economic planners in China are doing right now. it seems to be reacting to the market rather than trying to guide the market.
Latha: So, you feel they are waffling therefore is this a bigger package than just a reserve requirement and a rate cut? Will there be a fiscal announcements as well?
Rein: I think we all need to take a step back. So, the equity markets are plummeting, but the real economy is still doing pretty well. So, unless the equity markets continue to present a systemic risk, I do not think the government should launch a major stimulus plan. Unemployment is still pretty strong. The big concern right now that we all have to wonder is A, how much of the profits on the corporate side in China has been due to stock market change in the last six months rather than real process and B, even more importantly how many companies have used their share as collateral for margin financing so that they could invest in the stock market. So, if B is really quite negative, then we have a systemic risk. If B is not as large as a lot of analysts are thinking then the real economy is relatively okay even though it is definitely going to slow dramatically in the next few months or so.
Latha: But is this not different from what we have heard. We have heard a lot of experts saying that China there is an economic slowdown which was slower than what the world had discounted in the financial markets. That purchase managers’ index (PMI) was what triggered all the selling, not the stock market volatility. The worry is economic, not stock market at least for the world outside.
Rein: I think a lot of so called experts talk well but they do not provide any proof. So they have been saying that the government makes up the gross domestic product (GDP) numbers but, they do not provide strong analyses to why that is true and they do not comes up with something alternative. It is something like picking up a GDP number out of the hat. So, I just count what most of these so called experts say. If you take a look at it, unemployment is still pretty strong. It is still quite easy to get a job and it is symmetric that people need to look at. It is not GDP, it is not electricity growth, it is really more recent call that are they able to get jobs or not which they are and low income Chinese. And they are often able to get jobs quite easily with salary increase of 10-15 percent. If you look at it, university grads this year are asking for about renminbi a month, that is 30 percent more than they did last year. These would be graduates from the top-tier universities in China. So, the economy is bad, do not get me wrong. It is very weak. But you have to detach from the doom based scenarios from a lot of these economists that are literally just pulling numbers out of a hat.
Sonia: Do you think this rate cut that the Chinese government or Chinese central bank has just announced is enough to stem the growth slow down that we have been seeing in China or does the government need to do more?
Rein: No, I do not think it is enough. I still think there is going to be a lot of volatility which I have been saying for the last several months here in the equity market. I think the real economy is on a continued downward trend. My concern right now is a lot of multinationals are less interested in investing here and if that situation happens, in a quarter we could see 6-6.5 percent GDP growth. So I hope that the government does not take on more debt in the next month. But by the end of the year, Q4, Q1 of next year, they might have to increase debt which is only about 280 percent of GDP so it is still manageable. But the government needs to move to reinvigorate the economy right now. But most importantly they have to build more confidence with investors and with businessmen, because right now, people feel like they are doing a checkerboard, hap-hazard type of planning rather than something that is well thought out and maybe do a better job of communicating their decision with global investors and businessmen.
Sonia: What is the sense you are getting. Are these measures enough to stem the slowdown in China?
Varathan: The measures are a start. They would however not be enough on two counts. If you are looking at it very myopically, just from the stock market point of view, it is not enough because the last time we had cuts and the last time we sponged some of the bleed it came back again and from an economic perspective real interest rates are much higher now in China for two reasons, one is inflation is low, the other reason of course is that the actual lending rates now in China are at a higher premium to the lending rate than they used to be. So, China can cut rates a lot further given if we co-relate with respect to how weak exports are or how weak manufacturing is so on and so forth. The other thing of course that we wanted to see is something more coordinated with some forward communication from China saying how much more stimulus there would be rather than a stance on prudent monetary policy. So, that would also be helpful.
Latha: Actually there are a lot more announcements. There is a 300 bps cut on reserve requirements for financial and auto leasing companies. Also there is an extra cut of 50 bps for what is rural lending. I am not very sure we are just getting those details. So, it is a package of moves. It is a reserve requirement cut generally and for all banks plus there was a 300 bps cut only for auto and leasing companies and of course the interest rate cut applies to everybody which is a quarter basis point. Will this mean that tomorrow you will see a little bit of joy, will you see more economic activity, what kind of economic growth are you pencilling in?
Varathan: Of course you will see a lot more joy particularly given that a lot of the leasing companies were facing particular pain. So, it is going to be a very welcome relief. Let us not get that wrong, that is surely going to be welcomed with open arms but there are still few things that are a bit off, the first is the fact that this is still a very uneven policy applied across.
So, to give it a bit more structure, to give it a bit more context the policy makers could have communicated a bit more about what they are doing and what they are trying to do further and beyond that the question is, is this enough to revive, is this enough as a relief but for revival of pickup in growth this certainly this needs to be complimented with more support measures for the property market as well as more support measures for exporters and manufacturers with the fiscal policy kicking in. So, a combo would have been much more effective in a medium to longer term.
Nayantara: Our markets didn’t get a chance to react to that interest rate cut news from China. What is your anticipation, how Dalal Street is going to react tomorrow?
Malkani: I think the markets are too clever and may be there was some rumblings of all this which is why Asia also turned and Europe opened strong and the Dow Futures are up. I would imagine more of an uptick tomorrow. There should be a sharp upward move in China. Having said all that these are all rather measures of desperation, taking a longer term view. It will be a great relief for us but overall this is somewhat signs of desperation. I think this is 5th such rate cut they are trying. The Communist Party bigwigs have to learn that you have to leave markets alone, they can't determine it like prices of soya or what have you.
Q: We were just talking to Jagdish Malkani and he believes that perhaps Dalal Street was anticipating this latest action from China and that is why we saw the kind of up move that we did today. Do you also subscribe to that view or you think our markets will react tomorrow?
Kabra: Your markets as Jagdish pointed out there, a kneejerk reaction would be positive but in longer perspective it is still more about developed market and emerging markets story. If you hold the view that dollar is going to remain strong, then developed markets are still the place. So, coming to Europe-I cover more European stocks and watching here in terms of economic trends, valuations and even sentiment, everything is suggesting that there would be a continuous rally especially on the developed markets side. So, European equities are lot more supported–I am sure we have exposure to China but the extent of macro backdrop that we have locally here is quite positive. So, we have --4.16--, liquidity tailwinds are still there, so generally the reaction that we saw in European stocks specifically in last two weeks it looked saturated. So knee-jerk action it looks it would be more broader based but few weeks later where we stand today, it would still be about developed market and not emerging market stocks.
Q: So you are saying that perhaps it is going to be about developed markets, so are you saying that Foreign institutional investors (FIIs now want to go back to Europe, they want to go back to the United States, that story of the emerging markets is over even if you have what some believe India to be a shining star among the emerging markets (EMs)?
Kabra: Definitely there would be pockets within emerging markets, India should be one of those shining stars but across the board if you are watching the kind of trends we have seen for last few years, there has been a deflationary recovery usually in those scenarios, as in you still prefer developed market stocks.
I have been very positive Europe, Japan and even on Standard and Poor’s (S&P) we were expecting double-digit returns for second half.
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