China cuts rates amid growth fears
Beijing: China cut interest rates for the second time in less than a month on Thursday in a clear sign that growth is slowing more than Beijing expected.
The People’s Bank of China, the central bank, said the country’s benchmark one-year lending rate would be lowered by 31 basis points, effective July 6, while benchmark deposit rates would be cut by 25 basis points.
That brings the one-year lending rate down to 6 per cent and the deposit rate down to 3 per cent.
The move came as the European Central Bank cut its benchmark lending rate by 25 basis points to a historic low of 0.75 per cent and the Bank of England held its rate at 0.5 per cent but increased the level of quantitative easing by £50bn to £375bn.
The PBOC cut interest rates in China for the first time in three years on June 8, just days before Beijing released data showing a continued decline in growth indicators.
Beijing is set to publish a raft of data next week, including gross domestic product figures for the second quarter, and it has a history of acting pre-emptively when data are especially weak.
“China’s decision to cut interest rates again, twice within a month, is a very important move,” said Nick Chamie, an analyst at Royal Bank of Canada.
“This aggressive policy action reflects, in our view, a deepening concern over the health of the economy by policy makers that the economy has yet to find a bottom and requires additional stimulative monetary settings to engineer a recovery.”
Some analysts have suggested that the easiest way for China to shore up flagging growth is to loosen tight restrictions on the residential property market, which the government has been trying to cool for the last three years following a boom.
But in announcing the interest rate cuts on Thursday, the central bank also ordered financial institutions to “continue to suppress speculative investments in housing” by selectively restricting credit to the sector.
With most indicators showing China’s economy is cooling rapidly, led in large part by a slowdown in real estate construction, Beijing has shifted approach over the past two months and introduced measures designed to stimulate growth.
It has ordered its economic planning agency to grant approvals for more large-scale industrial and infrastructure projects and has ordered the state-owned banking system to approve more loans.
Inflation figures due out next week are expected to show a steep slowdown in price increases to the lowest level since mid-2010.
That will have provided the central bank with more room to cut interest rates without having to worry so much about a rebound in politically sensitive food inflation.
On Thursday the central bank also took a small step towards liberalising tightly controlled interest rates by allowing banks to offer loans at rates 30 per cent lower than the benchmark, compared with the previous 20 per cent permitted discount.
Most analysts believe that China’s increasingly aggressive efforts to boost flagging growth will lead to a rebound in growth in the third quarter.
“Looking ahead, we expect GDP growth will have bottomed out in the second quarter and will pick up strongly in the second half,” economists at ANZ Bank said in a note on Thursday.
But some economists and analysts, including many within the Chinese government, believe growth will continue to disappoint unless Beijing decides to pump up its real estate sector again.
Copyright The Financial Times Limited 2012
Posted on www.ft.com on July 1, 2012 6:41 pm