The market continued its losing streak with the SSE Composite dropping 64 points to close at 2093, down 3.0% for the day, with financial institutions and property developers once again leading the way.  During the trading day my student Shang Ning sent me the following (slightly edited) email:

The PBoC issued 1-year bills, at 3.91%, 9bps lower than last week, and 15bps lower than the annual average 4.06%.  This pushed up the market like crazy; with yields dropping some 10-20 bps for medium-term treasuries.  Obviously the auction indicated that banks were eager to buy bonds. 

What else it can indicate?  Can it suggest a declining willingness to lend money out to corporations, since bond market and loan market are substitute goods?  Or a great expectation of basis rate cut soon?

Shang Ning seems to have got it right.  Seemingly as part of a concerted global effort to support markets, the PBoC announced later that it was cutting interest rates (for the second time in less than a month, after six years of raising rates), with the benchmark 1-year rate dropping from 27 bps to 6.93%.  The PBoC also reduced minimum reserve requirements by 50 bps to 17%.

How effective will these measures be in spurring the economy?  According to the most recent data loan growth has been slowing.  I don’t have the numbers in front of me but an article last week in Caijing had this to say:

In the second half of 2008, the People’s Bank of China loosened its credit control by five percent. But July and August statistics did not show a rebound for loan growth. Even if the quota were further relaxed, loan growth this year would hardly match 2007’s.

It seems to me that at least part of the reason for slowing loan growth has been corporate reluctance to borrow.  If that is the case, I doubt whether lower rates (let alone lower minimum reserves) will have much impact.  After all it hasn’t been high interest rates that have constrained borrowing in the past.