China needs more than rate cuts to boost economic growth

cnbc.com:

BEIJING — China's slowing economy needs more than interest rate cuts to boost growth, analysts said.

The People's Bank of China on Tuesday surprised markets by announcing plans to cut a number of rates, including that of existing mortgages. Mainland Chinese stocks jumped on the news.

The move may mark «the beginning of the end of China's longest deflationary streak since 1999,» Larry Hu, chief China economist at Macquarie, said in a note. The country has been struggling with weak domestic demand.

«The most likely path to reflation, in our view, is through fiscal spending on housing, financed by the PBOC's balance sheet,» he said, stressing that more fiscal support is needed, in addition to more efforts to bolster the housing market.

The bond market reflected more caution than stocks. The Chinese 10-year government yield fell to a record low of 2% after the rate cut news, before climbing to around 2.07%. That's still well below the U.S. 10-year Treasury yield of 3.74%. Bond yields move inversely to price.

«We will need major fiscal policy support to see higher CNY government bond yields,» said Edmund Goh, head of China fixed income at abrdn. He expects Beijing will likely ramp up fiscal stimulus due to weak growth, despite reluctance so far.

«The gap between the U.S. and Chinese short end bond rates are wide enough to guarantee that there's almost no chance that the US rates would drop below those of the Chinese in the next 12 months,» he said. «China is also cutting rates.»

The differential between U.S. and Chinese government bond yields reflects how market expectations for growth in the world's two largest economies have diverged. For years, the Chinese yield had traded well above that of the U.S., giving investors an