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Analysis | China’s half-measure rate cut protects banks’ profit margins and ensures financial stability, analysts say
- ‘Protecting bank margins is at the core of stabilising the entire financial system,’ says economist Huang Wentao
- The central bank might have more tools up its sleeve to shore up the economy, including reserve requirement ratio (RRR) cuts, says China Securities
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Yuke Xiein Beijing
The Chinese central bank’s underwhelming rate cuts this week may have taken the markets by surprise, but it will help to preserve the profit margins of commercial banks, the linchpin of the nation’s financial stability, according to analysts.
The five-year loan prime rate (LPR), a reference for mortgages, was left unchanged at 4.2 per cent on Monday. The one-year LPR, a benchmark for household and corporate lending, was reduced by a smaller-than-expected 10 basis-point to 3.45 per cent, according to data released on Monday by the People’s Bank of China.
The decision not to make bigger cuts surprised investors, with some worried that it could spark a slew of defaults in China’s crisis-ridden property sector, which could potentially spill over to the broader financial economy.
The move struck many as going against the country’s pressing goal of propping up its flailing economy and stabilising its property sector.
Some analysts, though, interpreted it as an attempt on the part of financial regulators to preserve the net interest margin (NIM) of commercial banks.
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Premier Li Qiang plays up China’s economic prospects at World Economic Forum’s ‘Summer Davos’
Premier Li Qiang plays up China’s economic prospects at World Economic Forum’s ‘Summer Davos’
“Lowering credit costs is essential for boosting economic growth, but protecting bank margins is at the core of stabilising the entire financial system,” wrote Huang Wentao, chief economist at China Securities in a report that came out on Tuesday.
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