CHINA ECONOMY HONG KONG — China’s central bank on Friday announced a surprise cut to interest rates, in the clearest sign yet that policy makers are growing increasingly concerned the country’s economic slowdown. Despite numerous signs that growth has been flagging, China’s leadership for months has refrained from any broad-based economic stimulus measures as policy makers tried to push through a package of ambitious financial overhauls. Instead, they opted for piecemeal efforts like injecting money into big banks. The overarching message was that Beijing was willing to tolerate slower growth to make way for more sustainable development. But China is now rethinking that message. China’s action comes at a time of growing worries over the global growth. Japan is now in a recession. Growth in Europe has stagnated. The global weakness has raised concerns that the ongoing recovery in the United States could falter. The rate cut helped buoy stocks around the world, as China looked to rev up its great growth engine — or at least keep it from sputtering too much. On Friday, the Standard & Poor’s 500 stock index was up nearly 1 percent. European equities were up 2.8 percent, also driven expectations that the European Central Bank was preparing another round of stimulus. China’s action, while not a major boost the economy, do help address areas of concern. Leaders had grown wary of adding to ballooning levels of corporate and local government debt. The lending had helped the country avoid the worst of the financial crisis but also increased the risks of financial shock or a wave of bad debt. At the same time, the signs of strain in the economy have been building. Home prices continue to slide, declining in October from a year earlier in 67 of the 70 biggest cities tracked in a major government survey, data released this week showed. Foreign investment, a boon to the economy for years, is contracting. And China’s huge manufacturing sector — a major employer and a driver of exports — is struggling with rampant overcapacity in many industries, leading to falling prices. Data from the Chinese government released last month showed that gross domestic product had expanded 7.3 percent in the third quarter, compared with the same period last year, the slowest quarterly pace since the depths of the financial crisis in 2009. The economy is on track to grow at its slowest rate in more than a decade this year. Friday’s interest rate cut appeared to show that the pace of China’s economic deceleration has become uncomfortably fast for the country’s leaders. The central bank was quick to say on Friday that the rate cut, its first since the summer of 2012, did not mean that monetary policy would change direction in a fundamental way or that more aggressive economic stimulus measures were on the way. “Over all, the country retains a mid to high rate of macroeconomic growth, price inflation has slowed, the economic structure is continuously being optimized and upgraded and growth is shifting from being investment-driven to being driven by innovation,” the central bank said in a statement. “Thus, there is no need to undertake strong stimulus measures, and the prudent monetary policy direction will not change.” The central bank, the People’s Bank of China, said Friday evening that it would cut its benchmark one-year deposit rate by 0.25 percentage point, to 2.75 percent, and reduce the one-year lending rate by an even greater amount, 0.4 percentage point, bringing it to 5.6 percent. At the same time, policy makers said they would give China’s banks more leeway in determining how much interest they pay on deposits, allowing them to pay as much as 120 percent of the benchmark rate, up from 110 percent previously. The changes take effect Saturday. Analysts said that the central bank’s rate cuts, while unexpected, would have only a modest effect on China’s overall economic growth. More immediately, they said, the effect would be to make financing slightly cheaper for large, state-owned companies, which tend to enjoy easier access to loans from the government-controlled banking sector. That will help ease China’s debt burden, as companies find it cheaper to pay off or to refinance loans that are coming due. “The impact on G.D.P. growth will be small,” Mark Williams, the chief Asia economist at Capital Economics, wrote Friday in a research note. “The main effect will be to improve the financial position of large firms.” “The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks,” he added. “The financing costs of smaller firms, which borrow from the shadow banking sector, will not be affected.” At the same time, analysts said, the central bank’s unusual step of reducing lending rates more steeply than deposit rates would add to pressure on profit margins at the country’s commercial banks. The so-called net interest margin, or the spread between borrowing and lending rates, still accounts for the vast majority of earnings at China’s banks. Over the last six months, China’s policy makers had sought to avoid broad measures like rate cuts in their attempts to support growth, opting instead for making new credit lines available to selected banks and financial institutions, usually for targeted purposes such as supporting the agriculture industry or the construction of subsidized housing. Those unconventional measures, which were not publicly announced but included the provision of short term liquidity to several banks, appear to have had limited effect. Borrowing costs remain high, and growth in new lending remains lackluster. By contrast, the central bank’s latest step reflects its “return to conventional monetary policy instruments, which are more effective,” Jianguang Shen, an economist at Mizuho Securities Asia in Hong Kong, wrote Friday in a research note. Mr. Shen and others said the rate cut increases the chances that China will introduce more policy-based easing measures in the coming months. “Today’s rate cut clearly signals that China’s central bank has changed its monetary policy stance to a more ‘accommodative’ one,” Li-Gang Liu, the chief economist for greater China at the Australia and New Zealand Banking Corporation, wrote Friday in a research note. Mr. Liu pointed to weak consumer price inflation, which recently dropped below 2 percent, as well as high borrowing costs, especially for small and medium sized firms. “The conditions for further policy easing are ripe,” he wrote. “Today’s rate cut suggests that the overall policy orientation has shifted to be more supportive.” (NYTIMES)
Posted on: Fri, 21 Nov 2014 16:35:45 +0000
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