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Shi Hailin， 31， is an investment project manager of a state-owned enterprise living in Beijing. After buying an apartment in the southwest Fourth Ring Road of the capital city in 2012， he became a fangnu， or mortgage slave， burdened with much financial pressure. Recently， Shi breathed a sigh of relief as the country’s interest rates were cut for the first time in over two years.
“Beginning in January 2015， the cut means more than 300 yuan （$49） a month in savings for me，” he said.
That’s not the only way the rate cut affects Shi’s life. “I will shift my focus on investment from the money market fund to the stock market， as lower interest rates are bound to create a bullish stock market in the near future，” Shi said.
On November 22， the People’s Bank of China， the country’s central bank， cut the benchmark one-year lending rate by 0.4 percentage points to 5.6 percent and the one-year deposit rate by 0.25 percentage points to 2.75 percent.
“The purpose of cutting the deposit and lending rates is to bring actual interest rates back to a proper level and lower the financing costs facing many enterprises，” the central bank said in a statement.
Industry insiders also hailed the move as a boost for the sagging property market， which drags on the broader economy. Some experts， however， say that the move alone is far from enough to make the economy stage a stunning recovery. Other means， such as reducing the reserve requirement ratio （RRR）， should be given full play to add liquidity to the market.
The long-anticipated rate cut came at a time when the country’s economic growth slipped to a multi-month low and a flagging property sector is posing an increasing threat to the broader economy.
China’s economy clocked its lowest quarter in more than five years in the third quarter of the year， with the GDP growth rate sliding to 7.3 percent from 7.5 percent in the second quarter.
Analysts say cutting interest rates shows the government wants to put stimulus into place to prevent further slowdown.
“It’s absolutely the right thing to do，” said Wang Tao， Chief China Economist at UBS AG in Hong Kong. “Real interest rates have moved up significantly with slowing growth and inflation， which hurts corporate cash flow and balance sheets. It also threatens to increase non-performing loans.”
Who will benefit？
The interest rate cut seems designed to stimulate loan demand and prevent the slowdown in China from worsening， said Bill Adams， a senior international economist for PNC Financial Services， in a research note. “Cutting interest rates is a way for Chinese economic policy to cushion the impact of slower economic growth without reopening the credit floodgates，” he said.
The interest rate cut will help lower the financing costs for businesses， especially small and micro ones that have received the heaviest blow from the current slowdown.
“The cut will help lower financing costs systematically at the start of next year， especially those for small businesses， the farming sector and real estate sector，” said Lu Zhengwei， chief economist at the Industrial Bank.
“China has done a lot to address corporate financing difficulties this year， such as cutting the RRR for certain banks， but cutting interest rates is the most direct way to bring down costs，” said Wang Jun， a senior economist with the China Center for International Economic Exchanges.
Zhao Qingming， chief analyst of the Institution of Financial Derivatives of China， said that the asymmetric interest rate cut will narrow the profit margins of banks and help shift part of the banks’ profits to companies.
“The profits of banks are much higher than average profits in the larger economy. From the perspective of China’s long-term economic development， banks must portion part of their profits to the real economy and find new ways of generating profits，” Zhao said.
The interest rate cut is set to become another major boon for the sluggish property market， following the easing of mortgage rules on September 30， and will fuel demand， analysts claim.
The property sector， which contributes to more than 15 percent of China’s economy and impacts more than 40 industries from cement to home appliances， suffered a notable downturn earlier this year. Sluggish sales data and falling prices， combined with large inventory， created a weak sentiment in the market， all weighing on the industry’s outlook and consumers’ confidence.
In the first 10 months of the year， sales of commercial properties decreased 7.8 percent， while inventories increased 28.4 percent， according to the National Bureau of Statistics （NBS）. Sixtyseven of 70 cities monitored by the NBS reported falling housing prices from the year-ago period in October. Property developers are eagerly clearing their inventories through discounts.
Immediately after the interest rate cut， Chinese stocks related to real estate rallied， and buyers’ enthusiasm was re-ignited in many cities， especially first-tier ones， as buyers took note of the cheaper home loans. “The biggest near-term beneficiary group will be mortgage borrowers， as mortgage rates will be reduced alongside the benchmark lending rate， helping to support demand，” Wang Tao said.
Zhang Dawei， chief analyst at Centaline Property Agency Ltd.， said the housing market， especially in first-tier cities， stood to benefit the most from the rate cut.
“The lending rate cut translates into remarkable discounts for first-time home buyers and will have a strong psychological impact on them，” he said.
Zhang explained that as a result of the benchmark mortgage rate cut， which stands at 6.15 percent， people with a 20-year mortgage loan of 1 million yuan （$162，866） will save about 234 yuan （$38） each month.
yi Huaqiang， an analyst with Beijing-based Huarong Securities Co. Ltd.， said the real estate sector is one of the industries that is very sensitive to monetary policies.
“Historically， every interest rate cut is a strong stimulus to the real estate segment，” yi said.
The interest rate cut requires both property developers and homebuyers to pay less interest， helping both the construction and purchase of properties， according to yi.
More needed
Some experts predict that the central bank is likely to cut interest rates again in 2015 and ease lending restrictions in the future amid concerns that a slowing economy could spark a surge in debt defaults， business failures and job losses.
Qu Hongbin， chief economist for Greater China at HSBC， said the interest rate cut signals a change of direction in China’s monetary policy from targeted easing to overall easing.
“It will pave the way for future credit easing. In 2015， the central bank will cut rates twice and reduce RRR once，” Qu predicted in his Sina Weibo account， China’s Twitter-like microblogging website.
RRR is the percentage of deposits that commercial banks have to keep in reserve. An increase in RRR means locking away a certain amount of money that banks could otherwise lend. A cut in RRR means banks have a larger amount of capital available to fund loans. China cut the RRR for some banks in June， but a banking-wide reduction in the ratio hasn’t been seen since May 2012.
A report from Minsheng Securities Co. Ltd. said the recent interest rate cut is not the end but rather the start of a new round of loosening.
“Right now， the actual loan rate is at a historical high， and one rate cut can hardly lead to a fundamental improvement of the economy. In 2015， China will face more downward pressure in economic growth and in inflation； therefore， it’s necessary to reduce the loan rate，” read the report. “The reduction of RRR is very much likely to happen in the near future.”
Guo Lei， a senior analyst with Shenyin & Wanguo Securities Co. Ltd.， said China’s economic growth will hit a bump in 2015； therefore， he forecasts the central bank will cut interest rates again in the first half of 2015.
Guo said that， in the long run， growth momentum comes from China’s increasing efforts to bolster reforms.
“In 2015， reforms on China’s state-owned enterprises will be expedited to unleash lots of dividends，” Guo said.
“Another driver for China’s future growth would be the construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road，” Guo said. “It will be a major boon for the export of China’s infrastructure construction capacity， and other areas， such as trade and investment， will directly benefit from the two initiatives.”
“Beginning in January 2015， the cut means more than 300 yuan （$49） a month in savings for me，” he said.
That’s not the only way the rate cut affects Shi’s life. “I will shift my focus on investment from the money market fund to the stock market， as lower interest rates are bound to create a bullish stock market in the near future，” Shi said.
On November 22， the People’s Bank of China， the country’s central bank， cut the benchmark one-year lending rate by 0.4 percentage points to 5.6 percent and the one-year deposit rate by 0.25 percentage points to 2.75 percent.
“The purpose of cutting the deposit and lending rates is to bring actual interest rates back to a proper level and lower the financing costs facing many enterprises，” the central bank said in a statement.
Industry insiders also hailed the move as a boost for the sagging property market， which drags on the broader economy. Some experts， however， say that the move alone is far from enough to make the economy stage a stunning recovery. Other means， such as reducing the reserve requirement ratio （RRR）， should be given full play to add liquidity to the market.
The long-anticipated rate cut came at a time when the country’s economic growth slipped to a multi-month low and a flagging property sector is posing an increasing threat to the broader economy.
China’s economy clocked its lowest quarter in more than five years in the third quarter of the year， with the GDP growth rate sliding to 7.3 percent from 7.5 percent in the second quarter.
Analysts say cutting interest rates shows the government wants to put stimulus into place to prevent further slowdown.
“It’s absolutely the right thing to do，” said Wang Tao， Chief China Economist at UBS AG in Hong Kong. “Real interest rates have moved up significantly with slowing growth and inflation， which hurts corporate cash flow and balance sheets. It also threatens to increase non-performing loans.”
Who will benefit？
The interest rate cut seems designed to stimulate loan demand and prevent the slowdown in China from worsening， said Bill Adams， a senior international economist for PNC Financial Services， in a research note. “Cutting interest rates is a way for Chinese economic policy to cushion the impact of slower economic growth without reopening the credit floodgates，” he said.
The interest rate cut will help lower the financing costs for businesses， especially small and micro ones that have received the heaviest blow from the current slowdown.
“The cut will help lower financing costs systematically at the start of next year， especially those for small businesses， the farming sector and real estate sector，” said Lu Zhengwei， chief economist at the Industrial Bank.
“China has done a lot to address corporate financing difficulties this year， such as cutting the RRR for certain banks， but cutting interest rates is the most direct way to bring down costs，” said Wang Jun， a senior economist with the China Center for International Economic Exchanges.
Zhao Qingming， chief analyst of the Institution of Financial Derivatives of China， said that the asymmetric interest rate cut will narrow the profit margins of banks and help shift part of the banks’ profits to companies.
“The profits of banks are much higher than average profits in the larger economy. From the perspective of China’s long-term economic development， banks must portion part of their profits to the real economy and find new ways of generating profits，” Zhao said.
The interest rate cut is set to become another major boon for the sluggish property market， following the easing of mortgage rules on September 30， and will fuel demand， analysts claim.
The property sector， which contributes to more than 15 percent of China’s economy and impacts more than 40 industries from cement to home appliances， suffered a notable downturn earlier this year. Sluggish sales data and falling prices， combined with large inventory， created a weak sentiment in the market， all weighing on the industry’s outlook and consumers’ confidence.
In the first 10 months of the year， sales of commercial properties decreased 7.8 percent， while inventories increased 28.4 percent， according to the National Bureau of Statistics （NBS）. Sixtyseven of 70 cities monitored by the NBS reported falling housing prices from the year-ago period in October. Property developers are eagerly clearing their inventories through discounts.
Immediately after the interest rate cut， Chinese stocks related to real estate rallied， and buyers’ enthusiasm was re-ignited in many cities， especially first-tier ones， as buyers took note of the cheaper home loans. “The biggest near-term beneficiary group will be mortgage borrowers， as mortgage rates will be reduced alongside the benchmark lending rate， helping to support demand，” Wang Tao said.
Zhang Dawei， chief analyst at Centaline Property Agency Ltd.， said the housing market， especially in first-tier cities， stood to benefit the most from the rate cut.
“The lending rate cut translates into remarkable discounts for first-time home buyers and will have a strong psychological impact on them，” he said.
Zhang explained that as a result of the benchmark mortgage rate cut， which stands at 6.15 percent， people with a 20-year mortgage loan of 1 million yuan （$162，866） will save about 234 yuan （$38） each month.
yi Huaqiang， an analyst with Beijing-based Huarong Securities Co. Ltd.， said the real estate sector is one of the industries that is very sensitive to monetary policies.
“Historically， every interest rate cut is a strong stimulus to the real estate segment，” yi said.
The interest rate cut requires both property developers and homebuyers to pay less interest， helping both the construction and purchase of properties， according to yi.
More needed
Some experts predict that the central bank is likely to cut interest rates again in 2015 and ease lending restrictions in the future amid concerns that a slowing economy could spark a surge in debt defaults， business failures and job losses.
Qu Hongbin， chief economist for Greater China at HSBC， said the interest rate cut signals a change of direction in China’s monetary policy from targeted easing to overall easing.
“It will pave the way for future credit easing. In 2015， the central bank will cut rates twice and reduce RRR once，” Qu predicted in his Sina Weibo account， China’s Twitter-like microblogging website.
RRR is the percentage of deposits that commercial banks have to keep in reserve. An increase in RRR means locking away a certain amount of money that banks could otherwise lend. A cut in RRR means banks have a larger amount of capital available to fund loans. China cut the RRR for some banks in June， but a banking-wide reduction in the ratio hasn’t been seen since May 2012.
A report from Minsheng Securities Co. Ltd. said the recent interest rate cut is not the end but rather the start of a new round of loosening.
“Right now， the actual loan rate is at a historical high， and one rate cut can hardly lead to a fundamental improvement of the economy. In 2015， China will face more downward pressure in economic growth and in inflation； therefore， it’s necessary to reduce the loan rate，” read the report. “The reduction of RRR is very much likely to happen in the near future.”
Guo Lei， a senior analyst with Shenyin & Wanguo Securities Co. Ltd.， said China’s economic growth will hit a bump in 2015； therefore， he forecasts the central bank will cut interest rates again in the first half of 2015.
Guo said that， in the long run， growth momentum comes from China’s increasing efforts to bolster reforms.
“In 2015， reforms on China’s state-owned enterprises will be expedited to unleash lots of dividends，” Guo said.
“Another driver for China’s future growth would be the construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road，” Guo said. “It will be a major boon for the export of China’s infrastructure construction capacity， and other areas， such as trade and investment， will directly benefit from the two initiatives.”