China's central bank surprised markets for a second time this week with another monetary stimulus for its struggling economy.
The People’s Bank of China cut its one-year loan rate by 20 basis points (0.2%), after another cut to the short-term rate on Monday.
State media cited a "person close to" the PBoC explaining that today’s liquidity operations show the bank’s determination to provide a reasonable level of liquidity and consolidate the economic recovery.
China also doubled subsidies to encourage consumers to replace old cars, with the National Development Reform Commission and Ministry of Finance announcing tweaks to the policy on large-scale equipment renewal and the consumer goods trade-in schemes.
Consumers will now be able to enjoy double the previous subsidies when replacing old vehicles with new ones, with larger subsidies for 'new energy passenger vehicles' ie electric vehicles.
The PBoC move did not appear to help stock market sentiment, with benchmark stock market indices in Shanghai and Hong Kong down 0.5% and 1.8%, while the pan-continental Asia Dow fell 2.6%.
"Taken together the two rate cuts this week amount to a moderate amount of easing, and they are unlikely to boost the Chinese economy and spur consumer spending," said Kathleen Brooks, research director at XTB.
"However, they highlight a new sense of urgency within the Chinese government to prop up the economy after a series of economic data misses in recent weeks."
Julian Evans-Pritchard at Capital Economics says the PBOC’s decision to cut interest rates is "unusual for two reasons": being double the size of its usual adjustments and that normally adjustments to rates are done on the 15 of each month.
"So the PBOC made a conscious decision not to wait until the middle of August to carry out the latest cut," he said, which suggests that something changed in policymakers' thinking since Monday.
"Our best guess is that they had intended to wait and do a 10bp cut next month but that the underwhelming market response to the Third Plenum and Monday’s rate cuts pushed them to act with greater urgency."
Duncan Wrigley at Pantheon Macroeconomics said the change in thinking from the PBOC was likely as it "views the fall in global tech stocks as raising the probability of Fed rate cuts soon, providing China with room to ease policy without risking currency instability".
While encouraging as it signals a greater willingness by the central bank to adjust rates in more meaningful increments, the size of the cut will still not be sufficient to materially boost credit demand, said Evans-Pritchard, "so it will have to be followed up with additional easing if the PBOC is serious about providing substantial monetary support to the economy".
China's renminbi currency strengthened markedly versus the US dollar today, despite the cut, with both the onshore and offshore rates rising more than 3%.
Large state-owned banks also announced a coordinated trimming of deposit rates for one- and two-year deposits, while the National Development Reform Commission and Ministry of Finance also announced tweaks to the policy on large-scale equipment renewal and the consumer goods trade-in schemes.
Wrigley said these are all "tweaks, not massive changes", with the PBoC action "will be more effective if used to subsidise interest rates on equipment renewal loans, as some of the funds should be".
He said the change to vehicle subsidies "fails to address the issue that only a small share of the vehicle stock is eligible for trade-ins, as the vehicle must be a National III emission standard or older" but should still provide an incremental boost to car sales, once prices stabilise, but "probably won’t be game changing".
He expects the end-month Politburo meeting to bring further targeted support, given China's weak growth in the past quarter.