China's Rate Cuts

From FT Alphaville:

As you’ve surely just seen, China has cut its reserve requirement ratio, by 50bps with effect from Sept 6, and its 1yr lending rate by 25bps to 4.6 per cent with immediate effect.

Markets will like this. And the timing suggests that the ongoing stock market puke did have something to do with the decision.

But there’s also certainly a broader rationale to these moves.
From HSBC before the cut, first and most prosaically, on the lending rate:

After a cumulative 115bp policy rate cut, and with the help of rising pork prices, real interest rates, deflated by Consumer Price index, has fallen to an average level in 2014 (which itself was another 50bp higher from the average level in 2013). Meanwhile, producer price index deflated real interest is now a 210bp higher than the average level in 2014 (Chart 1). On average, for the economy as a whole, real interest rates have had a tightening, rather than loosening effect.
With the nominal policy rate remaining elevated at 4.85%, and the one-year deposit rate at 2%, there is evident room to reduce policy rate further. What is more, policy easing has worked to reduce borrowing cost for corporates as well as households, so there is little need to worry about wasting policy ammunition. We continue to expect a 25bp policy rate cut in 2H 2015.

And as Simon Rabinovitch says, “with producer prices still deep in deflation, China cut only manages to bring real lending rate down to about 10%”...MORE