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China’s rate cut ‘overdue’

AMP Capital chief economist Shane Oliver believes China’s rate cut is good news for Australia’s economy as well as its own.

The People’s Bank of China has reduced the 12-month benchmark lending rate by 0.4 per cent to 5.6 per cent, and the 12-month benchmark deposit rate by 0.25 per cent to 2.75 per cent.

Mr Oliver said China’s rate cut adds to the determination of global policymakers to avoid deflation and support growth, and is part of a global pattern which includes quantitative easing in Japan and Europe.

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“The Chinese rate cut and the signal of determination to support growth it provides is also positive for commodity prices and the Australian share market,” he said.

“While a return to a secular bull market in commodities and relative outperformance by Australian shares is unlikely, both have been oversold lately and China’s move could provide the trigger for a decent rally into year end.”

Mr Oliver said cutting rates is the most effective way to cut Chinese borrowing costs as bank lending rates are still largely priced off the benchmark rate and are mostly above it.

“Rate cuts will benefit private sector companies that have been paying very high interest rates and households with housing debt,” he said.

“It won’t stop a gradual structural slowing in Chinese growth, but it adds to confidence that China will avoid the hard landing that many still see around the next corner.”

Mr Oliver said concerns surrounding a potential housing ‘bubble’ and ‘shadow banking’ are exaggerated, and that neither would be significantly impacted by the rate cut.

“There has been no generalised housing ‘bubble’ – household debt is low at 30 per cent of GDP, house prices have not kept up with incomes and there is an undersupply of affordable housing,” he said.

“China’s ‘shadow banking’ system has grown rapidly but it is still relatively small, lacks leverage, lacks complexity and lacks heavy foreign exposure.”

China’s rate cut ‘overdue’
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