Last night the People's Bank of China cut interest rates for the second time in just four weeks.
The surprise reduction is sure to stoke fears that the mainland's second-quarter economic growth rate - due to be announced next week - will be even weaker than the 7.5 per cent or so that analysts were expecting.
However, just as significant as the headline-rate cut was the asymmetric nature of the reduction. While the benchmark one-year savings rate fell by 0.25 percentage points to 3 per cent, the key lending rate was cut by a slightly larger 0.31 percentage points to 6 per cent (see the first chart).
On top of that, the central bank said that from now on banks would be allowed to make loans at rates as low as 70 per cent of the benchmark lending rate.
As a result, the minimum one-year lending rate has been reduced to just 4.2 per cent, from 5.9 per cent at the beginning of June. On paper, that exerts a painful squeeze on the margins the country's banks can expect to make between what they pay on their deposits and what they get on their loans.
Just a month ago, they were able to look forward to earning a spread of at least 2.4 percentage points between what they paid on one-year savings deposits and what they earned on one-year loans. After yesterday's cut that spread has fallen by half to just 1.2 percentage points.
In the near term that's bound to hurt the share prices of China's main banks, which have already fallen heavily since early April (see the second chart), when Premier Wen Jiabao signalled Beijing's new tougher policy stance towards the banking sector, declaring 'our banks are profiting too easily'.
In reality, however, yesterday's asymmetric interest rate cut will make little difference to banks' margins.
A couple of years ago, mainland banks typically made two-thirds of all their loans either at or slightly below the benchmark lending rate. With doubts now mounting about the country's growth prospects, however, the picture has changed. These days, banks only make a third of their loans at or below the benchmark rate. Two-thirds are made at interest rates above the benchmark. As a result, yesterday's cut is unlikely to greatly affect the interest rates at which the banks are actually making loans.
That might be good news for bank interest margins, but for anyone hoping lower interest rates will boost economic growth rates, it looks ominous.
According to reports in the mainland media, bank lending fell further in June after a weak month in May. Figures won't be announced officially until next week, but according to one report, the mainland's 'big four' banks, which dominate the financial sector, extended just 200 billion yuan (HK$245.8 billion) in new loans last month. If correct, that would signal a big fall in overall bank lending. Despite lower benchmark interest rates, a decline in demand for new loans shouldn't be too surprising.
In the past, a large portion of bank lending has been channelled into property investment, which last year made up around 10 per cent of the country's overall gross domestic product.
But with senior government officials insisting that curbs on the property market will remain in place despite slower economic growth, real estate investment has plunged in recent months. Naturally enough, less demand to invest in new property developments means less demand for bank loans.
As a result, some analysts doubt whether further interest rate cuts will do anything to spur bank lending. With external demand weak, the domestic economy burdened by overcapacity, especially in the manufacturing sector, and the potential for profitable real estate speculation curtailed by Beijing's property market restrictions, the demand for new loans just isn't out there, even at a lower price.
That means yesterday's interest rate cut, although at first it sounds like good news, may do little or nothing to boost China's economic growth rate.