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China has cut rates, but what's next?

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2023-06-21

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China may have made the last of the current round of official interest rate cuts on Tuesday, but the question economists are now pondering is, what does the government of President Xi Jinping do next to add to the impact of the very modest rate cuts.

The answer might be revealed (in part) at midday today (Wednesday) when the country’s powerful State Council has scheduled a media conference in Beijing to make a major announcement on subsidies for so-called New Energy Vehicles (NEVS).

If that happens, it will perk up global lithium stocks, led by Australia which is in the announcement in the trading time zone of the ASX.

China’s State Council and government officials have made it clear in recent weeks that stimulating demand for cars, especially NEVS and boosting exports of both this year, are now a central policy for the government.

As expected yesterday, the People’s Bank of China cut the two final key lending rates for the first time in 10 months to try to prop up growth in the world’s second largest economy, especially in the lacklustre property sector.

The Chinese central bank cut the one-year loan prime rate by 10 basis points from 3.65% to 3.55% and trimmed the five-year loan prime rate by 10 basis points from 4.3% to 4.2% — for the first time since August.

That was after a series of cuts to other official rates last week and a government inspired series of cuts to bank deposit rates in the final week of May which helped set up the latest trims.

These cuts are trims - not all that significant, more symbolic.

“On their own, 10bps cuts are too small to make a great deal of difference to monetary conditions, especially since market interbank rates are already below policy rates,” Capital Economics’ Julian Evans-Pritchard and Zichun Huang wrote in a note issued after the decision was announced.

“But the PBOC tends to use changes in policy rates as a signalling tool, with the heavy lifting being done by other tools such as adjustments to reserve requirements and bank loan quotas,” they added. “The latest round of rate cuts suggests that these tools will be deployed too.”

But the lithium and battery sectors are watching today’s State Council announcement which Beijing reports say will see China introduce policy initiatives to promote the "high-quality development" of the new energy vehicle (NEV) industry.

A notice posted on the website of China's State Council Information Office shows it will hold a regular briefing at 10 am Beijing time on Wednesday, June 21, to introduce the promotion of "high-quality development" of the NEV industry and take media questions.

China's current policy to support the NEV industry is mainly the exemption of purchase tax.

In order to support the development of energy-efficient vehicles, China first started to exempt NEVs from purchase tax in 2014. The policy originally expired at the end of 2017 but was renewed before its expiration until the end of 2020. In March 2020 as the pandemic set in, China renewed the policy again until the end of 2022.

On September 26, last year, several Chinese government departments announced in an official announcement that the purchase tax exemption for NEVs would continue until the end of 2023.

Some local governments (such as the Shanghai municipal government) have offered limited exemptions to help maintain NEV sales in their areas. That has helped sales of Tesla battery powered NEVS.

On June 2, a Bloomberg report said that China was considering extending the tax exemption for cheaper (i.e., smaller) NEVs for another four years.

Hours after that Bloomberg report was published, state broadcaster CCTV reported that a State Council meeting had indicated that China would extend and optimise the vehicle purchase tax exemption for NEVs.

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