China surprises with rate cut ahead of Q2 GDP

The People's Bank of China has cut leading interest rates for the second time in less than a month in a surprise move that appears to indicate that policymakers are concerned about avoiding a hard landing by the world's second largest economy as growth continues to slow.

The central bank lowered the one-year benchmark savings and lending rates, coming after a 7 June cut – the first since 2008 – and three cuts in bank reserve requirements (RRR) since last November.

The cut comes just one week before the release of data on second-quarter GDP. Growth had decelerated to 8.1% in the first quarter – the slowest in almost three years. It coincided with a move by the ECB to lower the eurozone benchmark refi and deposit rates, while the Bank of England added to its quantitative easing measures.

Key takeaways: The cut signals that the government intends to support economic growth more aggressively Additional rate and RRR cuts are clearly an option before the end of the year as Beijing is likely to remain accommodative The change could be pre-emptive ahead of key economic data for June due next week The timing indicates a desire to give the impression of a concerted effort among central banks In the short term, the cut may hurt bank margins, but it should be positive for the economy by limiting downside risk to investment growth Capital-intensive sectors such as property, infrastructure and utilities should benefit

We expect additional fiscal measures such as accelerated spending on public housing, power and rail. We favour investment themes such as long-term public housing, solid commodity housing sales, consumer discretionary and financial services.