China’s decision to lower interest rates should be positive for global markets if it eases concerns over a slowdown in the world’s second largest economy, the Bangko Sentral ng Pilipinas (BSP) chief said on Monday.
Central bank Governor Amando Tetangco Jr., however, also warned that structural reforms were still needed and noted that flows to safe havens could follow Friday’s rate cut. Some analysts, meanwhile, declared that China’s easing would do little to support growth.
Regional bourses – the Philippine Stock Exchange (PSE) included – posted gains on Monday but currencies fell against the dollar. Expected to add volatility is a US Federal Reserve meeting later in the week.
“To the extent the moves of the Chinese authorities would ease fears of an abrupt slowdown in Chinese economic growth and support Chinese corporate balance sheets, these should be good for global market confidence,” Tetangco said in a text message to reporters.
The People’s Bank of China (PBOC), over the weekend, cut both the benchmark deposit and lending rates to 1.50 percent and 4.35 percent, respectively. The PBOC also cut the reserve requirement ratio (RRR) to 17.5 percent.
Tetangco said markets would continue to look for the necessary structural reforms that would sustain domestic demand and other sources of growth for the Chinese economy.
“In the near-term, we may see some rebalancing of flows toward US assets as well as to EMEs [emerging market economies]that have strong macrofundamentals,” he said.
The BSP, Tetangco said, will continue to monitor developments and tweak policy if needed.
During its last policy meeting in September, the Monetary board kept overnight borrowing and lending rates at 4 percent and 6 percent, respectively, noting that the domestic price situation remained manageable.
Accord Capital Equities Corp. analyst Justino Calaycay Jr. said the interventions made by the PBOC and the Chinese leadership would likely show a positive impact on upcoming numbers and data.
It could also mean that the US Federal Reserve would move a step closer finally raising interest rates, he added.
“So, while I agree with the BSP’s view, at the end of the day, it is the sustained strength of the domestic fundamentals that give me confidence in the forward outlook,” Calaycay said.
Fitch’s BMI Research, meanwhile, said the PBOC decision to lower interest rates further would do little to support economic growth and would further undermine confidence in the yuan, which is expected to weaken in the coming months.
“The rate cut will not be the last, and we maintain that some form of quantitative easing will ultimately be relied upon to prevent a credit crunch and the associated debt-deflation cycle,” it said.
BMI noted that the more the PBOC relied on monetary stimulus to prevent a collapse in growth and a financial crisis, the longer it would take to correct the economy’s imbalances and the weaker the long-term growth outlook would become.
“This was the course of action employed by the Japanese authorities following the 1980s growth boom, and seems to be the path that the Chinese authorities are going down, supporting our long-held bearish views on economic growth,” it said.
Singapore’s DBS said the incremental effectiveness of China’s monetary policy to stimulate the real economy was weakening given a hefty domestic debt burden.
“Newly generated liquidity is partially channeled to debt repayment and to ease cash flow shortage. Successive interest rate cuts do not necessarily guide the cost of capital lower due to rising credit risks,” the bank said in a research note.
DBS added that loosening policy rates also did not resolve the problem of overcapacity as evidenced by a persistent negative reading for the Producer Price Index.
It will not boost consumer confidence instantly either, it added.
“Nevertheless, the tactic somewhat eases short term liquidity stresses. At the current level of RRR at 17 percent, there is plenty of room to cut further,” DBS said.
On Monday, the benchmark Philippine Stock Exchange index (PSEi) ended higher at 7,324.40 up 88.02 points for a 1.22 percent increase. The wider All Shares index also added 42.51 points or 1.02 percent to 4,2013.15.
The peso, however, weakened to P46.54 to $1, losing 10 centavos from its P46.44 close last Friday.