China monetary easing - more important than the Fed?

There is the thought that this is important news. It is but not because the PBOC will lead to a global recovery.

China lowered one year lending rate by 25 bps to 6.31 percent. This was the first cut since 2008. There was also a loosening of controls on bank lending and deposit rates.  The one-year deposit rates move down to 3.25 percent. There will be more flexibility around those rates. Banks can offer a 20% discount from the lending rate as opposed to the previous level of 10%. Deposit rates can move up to 10% higher than the posted rate.

Banks are tightly controlled by the government. There is no independent banking system for large sized lending. Most lending is controlled by the Big 4 banks. There is not an independent bond market. Cutting rates and allowing higher deposit competition states that the lending targets are not being hit and more deposits have to gained in order to improved the borrowing base. There is a problem with the loan portfolios for many of these institutions steps have to be taken to improve banking in a slower growth environment. 

An interesting book on banking in China is Red Capitalism: The Fragile Foundation of China's Extraordinary Rise by Carl Walter and Fraser Howie. Walter and Howie argue that there is no western style banking system in China. The face of banking may seem like Western institutions but it almost completely controlled by the state. The state controls the lending process and the state enterprises are often the borrowers. The SOE's may not pay back their loans and banks have to cover the loses and the problems. Nothing changes with a lowering of rates. There may be some adjustments but banks needs the stored to ensure their survival.

This lowering of rates is not a positive sign but an indication that there are further problems in Chinese financial markets.