China's latest cuts in both interest rates and reserve requirement ratio (RRR) are likely to result in bullish running of bond and stock markets, note analysts. The People's Bank of China (PBOC), the central bank, announced on Friday that it will cut the benchmark deposit and loan interest rates by 0.25 percentage point to 1.5 percent and 4.35 percent respectively starting October 24.
Meanwhile, the RRR for financial institutions will be slashed by 0.5 percentage point. The RRR for qualified financial institutions supporting small and micro companies and agriculture will be lowered by another 0.5 percentage point, the PBOC announced. Lu Zhengwei, chief economist of the Industrial Bank, notes that the lower-than-target GDP growth, weak inflation data and downcast producer price index (PPI) all contribute to the interest rate and RRR cuts. China's GDP growth dropped to a six-year low of 6.9 percent in the third quarter, slightly lower than the 7 percent in the previous two quarters, the National Bureau of Statistics announced on October 19.
Meanwhile, China's consumer price index (CPI), the main gauge of inflation, rose 1.6 percent in September from last year, down from 2 percent in August. The producer price index (PPI), a measure of costs for goods at the factory gate, fell 5.9 percent year on year, marking the 43rd straight month of decline. Analysts widely believe the interest rate and RRR cuts will do good to both bond and stock markets. "The move is a new catalyst for bond market rally," holds Xu Hanfei, chief bond analyst with Guotai Junan Securities, adding that investors are advised to wait patiently for other good news in the future.
Wang Hanfeng, an analyst with China International Capital Corporation (CICC), notes that the move will boost stock market in the short-term. However, as A-shares have rebounded by nearly 20 percent since August, we can not rule out the possibility of correction in the long run. Li Daxiao, chief economist of Yingda Securities, also voices the similar opinion that the cut of interest rates and reserve requirement ratio (RRR) will not only do good to the recovery of stock market, but also help stabilize property market and economic growth.
"The interest rate and RRR cuts are well within expectations. We expect that the move will give rise to a round of bullish running of bond market and bolster stock market to a great extent, especially to stocks in financial sector," says Luo Yi, chief economist with Huatai Securities.
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