Rates cut, just a start of relaxation

Rates cut, just a start of relaxation

On 15 Sep 2008, PBC decided to lower RMB benchmark lending rate, and
RRR of small and medium-sized financial institutions

The pressing economic situation calls for overall relaxation in
monetary policy. According to the August data,investment, export and
consumption maintain sound momentum while industrial production once
again sharply declined,which indicates that the Olympic has exerted
negative impact on the economic growth rate in 3Q. Although PPI hit a
recordhigh, CPI drops below 5%. Given the slower economic growth and
controlled inflation, we believe the appropriate timing ofthe rate
cuts fully matches the demand of the current economic situation. The
relaxation reflects the principle of differentiation and optimization.
As for the interest rate, lowering lending rate notborrowing rate to
some extent narrows the net interest margin of the bank, which is
beneficial to the industrial and real estate enterprises. The
short-term lending rate drops by a wider margin than the long-term,
which encourages enterprises to increase short-term loans and has
little impact on the long-term loans. This is good for enterprises to
resolve the imperativeproblems. As for the RRR, downward adjustment
was made not to the state-owned commercial banks. Those of small
andmedium-sized financial institutions and quake-hit areas were
lowered by 1 or 2 percentage point, which increases the capitalof
small and medium-sized financial institutions and is helpful to
resolve their problem and those of quake-hit areas. Here theprinciple
of preferential policies and structural optimization is reflected. The
macro-regulation strategy is good for China's economic development. In
1H08, China adopted a tight monetary policy to curb inflation. In 2H,
with plummeting oil and commodity prices, the world economic outlook
is still gloomy―The situation of strong export and weak domestic
demand has not been remarkably improved in the US. With tax rebates
effectsgradually evaporating, US 4Q economic growth is faced with
challenges. The 2Q economic growth rate of Euro zones andJapan
registered a q-o-q decline. It is estimated that the trend will not
recover until next year. China once again takes amacro-regulation
strategy to relax the monetary policy. It could make use of the
current receding inflation to develop its economy Relaxation in
monetary policy just begins. The central bank adjusted its monetary
policy according to the macro-economic situation. In 2003, it adopted
a moderate monetary policy. In July 2007, it carried out a moderately
tightmonetary policy. In 2008, it implements a tight monetary policy,
raising deposit RRR five times to a record high of 17.5%
withcumulative frozen capitals from the banking system reaching RMB
1.2 trillion. Inter-bank market interest rate maintains at a high
level and the growth rate of money supply hit a two-year low. Although
the inflation is under control, given the various impacts of tight
policy, Olympics and global economic slowdown, the economic growth
rate has witnessed a decline. If policies were not appropriately
adopted, the economy might experience a hard landing. Therefore, from
July on, polices areshifted from "double preventions" to economic
growth and inflation control. Relevant reports of the central bank do
notmention the word "tight". We believe the adjustment this time will
be a symbolic shift of policies and more relaxed policies willbe
adopted, but it is more of a tentative attempt and is not that
forceful. In the future, greater efforts to adjust the policies will
be made. We expect that the loan quota will be raised with deposit RRR
and interest rate be lowered within the year once more.