China Cuts Interest Rates As Economy Slows

This Bystander has been relatively sanguine about the pace at which China’s economy has been slowing. Thursday’s surprise announcement of the first cut in interest rates since 2008 suggests the economic headwinds are blowing harder than thought.

The benchmark one-year lending rate will fall by one quarter of a percentage point to 6.31%, and the discount banks can offer doubled to 20%, both effective Friday. At the same time the one-year deposit rate will be lowered by a matching 25 basis points to 3.25%.

The latest monthly inflation, investment and output numbers due out over the next couple of days will no doubt provide the evidence of why the cut is needed and can be made now. Even if the cut is only to hold real (i.e. inflation-adjusted) interest rates, the question is whether companies’ weak spending is because borrowing costs are too high or because they already have sufficient capacity to meet lessening demand. We suspect it is the latter.

Footnote: Wednesday’s second postponement of new bank capital adequacy rules, this time until the start of next year, a year on from their original implementation date, clears space for additional lending-driven stimulus should the government feel it needs to step in again to provide some demand.

About these ads

2 Comments

Filed under Economy

2 responses to “China Cuts Interest Rates As Economy Slows

  1. Pingback: Inflation Fall Confirms Scope For Rate Cuts | China Bystander

  2. Pingback: The Confusing Slowing Of China’s Economy | China Bystander

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s