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China cuts lending rate in bid for stable growth

A shop assistant checks hundred yuan bank notes at a shop in Xiangfan, central China's Hubei province, August 19, 2006.


China is moving ever more aggressively to shore up its economy amid signs of flagging growth, providing a boost to the troubled global recovery.

The People's Bank of China cut its benchmark lending rate for the first time since the 2008 financial crisis, by one-quarter of a percentage point, signalling its determination to promote stable economic growth. Thursday's move also suggests policy makers expect more dismal data later this week with the release of reports on inflation, industrial production and bank lending for last month.

Thursday's rate cut sent a wave of relief through global markets that have been fixated on data from Beijing, given the importance of the Chinese economy to the world recovery.

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"For financial markets, this will be seen as a positive, as one of the engines of global growth is provided with monetary accommodation at a time where global economies remain challenged," said Ian Pollick and Mark Chandler of RBC Dominion Securities.

April's numbers from Beijing were gloomy and most economists were already projecting more of the same for May, with private growth forecasts dipping to 7.5 per cent or lower as the euro zone crisis collides with China's own efforts to cool a burgeoning property market.

"The fact they are doing this now tells us that data is going to be really horrible," said Arthur Kroeber, managing director for research firm GK Dragonomics. "It's part of a broad package carefully calculated to stimulate the economy, but not stimulate it too much."

In a year when China is meant to see the beginning of a transfer of power, the country cannot risk any instability that might come with economic troubles.

Starting with the 18th National Congress of the Communist Party in October, President Hu Jintao and the country's Premier, Wen Jiabao, will begin the process of handing over to their successors after a decade in power. Policy makers are consumed with maintaining economic and social stability, to ensure a smooth transition.

"The move is clearly a response to a string of disappointing economic data and, in particular, the weakness of credit growth in the wake of government stimulus calls," Mark Williams, chief Asia economist for Capital Economics in London, said in a report "Many harbour doubts about the wisdom of another credit-fuelled stimulus, but the government's overriding objective is to ensure that the economy is not too fragile in the final months before the leadership transition."

The 12-month lending and deposit rates will fall by 25 basis points effective Friday, leaving the one-year deposit rate at 3.25 per cent and the one-year lending rate at 6.31 per cent. Banks will also be allowed to offer loans at a 20-per-cent discount on the benchmark rate, an increase from the previous 10-per-cent cap; deposit rates, previously set at benchmark, can now rise to 1.1 times the benchmark.

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The benchmark interest rates in China have remained the same since a 25-basis-point hike in July, 2011.

A researcher from the Development Research Centre of China's State Council, its cabinet equivalent, told the state Xinhua news agency that the move would help with business financing and new construction, and stimulate credit demand. "Given China's current economic situation and its policy shift toward maintaining growth, the cut is well within expectations," Zhang Liqun said.

The Chinese government has been clear that no one should expect a return to 2008-style stimulus packages in the event of another extended global economic crisis. Still, in recent weeks infrastructure approvals have been stepped up and some modest rebate programs for consumers have been reintroduced; this interest-rate cut, too, carries echoes of 2008.

"The niggling worry of course for much of this year has been the sustainability of Chinese economic expansion, with a few worrying signs that this was slowing, albeit to a rate that the rest of the world would still be more than happy with," said David Jones, the chief market strategist at IG Index in London. "Today's action by the Chinese central bank is seen as a shot in the arm which should be felt throughout the global economy."

"They still have concerns about inflation and property bubbles, but I think the larger concern has become stability of growth. If you don't have overall macroeconomic stability, there is no point for you to try and control the housing market bubbles. So providing stimulus is for that purpose, as I think stability is paramount now," Ren Xianfang, an economist with HIS Global Insight, told Bloomberg.

A cut to banks' reserve requirement ratios last month did not stimulate lending as much as hoped, GK Dragonomics Mr. Kroeber added, as companies simply stopped seeking loans to expand – discouraged both by fear of economic slowdown, and by anticipation that interest rates would eventually fall.

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He predicted slow stimulus moves will continue into the fall, until poor results – exacerbated by their measure against a strong first-half last year – start improving.

"The idea here is to get the corporate sector, particularly in things like construction materials and so forth, to start borrowing money and get things going again," he said. "What they like to do is a little bit of this and a little bit of that … Little by little, they'll up the ante, here and there, until they have enough."

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