Rate reforms in China

Purchasing Managers’ Indices (PMI) are economic indicators derived from monthly surveys of companies, it is a good indicator of the overall health of economy. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month and a reading under 50 represents contraction. The HSBC China Manufacturing PMI fell to a six-month low of 50.0 in the final reading for November, down from 50.4 in October. Domestic demand in China expanded at a sluggish pace while new export order growth eased to a five-month low. Economists say China could miss its annual growth target—set at about 7.5% for 2014—for the first time since the 1998 Asian financial crisis.

China’s central bank succumbed to political and market pressure and finally cut interest rates on Nov 21, for the first time in more than two years. People’s Bank of China (PBoC) cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%, making it cheaper for business to borrow in order to hire or expand. Well-established private companies typically borrow from banks at around 7% to 7.5. That is still far better than the 10% to 15% rates that they get from shadow banks or informal lenders. The benchmark one-year deposit rate was reduced to 2.75% from 3%.

Mainland lenders are hardly prepared to weather the reforms in deposit rates. The economic slowdown has struck bank balance sheets this year in the form of increasing non-performing loan ratios.

The PBoC’s rate cuts will help to stabilize manufacturing investment in the coming months. Further monetary and fiscal easing measures to offset downside risks to growth are widely expected. To know more on how the fiscal reforms in China can have an impact on your investment portfolio, contact Dino Zavagno or a member of his team at Gladstone Morgan on info@gladstonemorgan.com

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