Sunday, June 28, 2015

2015-05 Interest Rate Trends

Both the short-term state sector and long-term private sector interest rates fell significantly in May.

The Shanghai Interbank Offer Rate (Shibor) ended May at 1.04%, down 65 basis points from April. The trailing average for May is 2.20%, meaning Shibor is currently less than half the trailing average. The lowest rate ever reached was 0.80% in March, 2009, but 1.04% is still the lowest rate since June, 2009.

The Wenzhou Comprehensive Index ended May at 18.73%, down 114 basis points from April. It is also 97 basis points below the trailing average for May, and the lowest point for the data available. On May 10th, the People's Bank of China announced that it would adjust interest rates down. The interest rate charged for loans less than one year was reduced by 25 basis points down to 5.10%. The interest rate on one-year time deposits was also decreased 25 basis points to 2.25%. Reuters quoted the central bank's justification as being:
"At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average."
The "domestic prices" they are referring to must not include equities. The Wenzhou Comprehensive Index is published by the Wenzhou City Local Finance Management Bureau. Occasionally, they publish reports on trends they see in the data. In the beginning of June, reports for January through May were updated. One observation they made was that "Examining lending periods show that short-term interest rates are higher than long-term interest rates.  Market transactions are primarily focused on short- and medium-term lending."

In May, the interest rate on a one-month loan was 18.81%, but a six-month loan was only 16.21%. April showed a similar trend. Shibor is the second-most market-oriented indicator for interest rates, but it is not showing an inverted yield curve. An inverted yield curve has generally been followed by a recession in developed countries. Perhaps the Wenzhou Comprehensive Index is telling us that China is experiencing, or will experience, a recession?