Jake's View | Rate cuts may put China on road to debasing currency

The mainland's surprise move to reduce interest rates for the first time in more than two years has fired up expectations of further cuts aimed at shoring up an economy that is on track to record its weakest annual growth since 1990.

Almost everyone applauded. Our reports carried only a single brief mention that cutting lending rates by 40 basis points and deposit rates by only 25 would further squeeze bank margins.

But, hey, that's the big banks. It is their turn for once. They can take it.

Yes, they can, but not forever, and there is reason to think that the People's Bank of China does the health of the country's financial system no great favours here.

Let's put some perspective on it. Savings through bank deposits are proportionately greater in China than in many other economies. China's deposit base of 113 trillion yuan (HK$142.7 trillion) amounts to 186 per cent of gross domestic product. The equivalent ratio in the United States is only 58 per cent.