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.