CHINA’S central bank cut benchmark interest rates on Friday, answering rising concerns over the health of the world’s second biggest economy as factory activity slows, house prices fall and growth rates slide to their lowest in almost a quarter century.
In a move that caught many traders off-guard and is the first of its sort for more than two years, the People’s Bank said that it would lower its one-year lending rate by 40 basis points to 5.6 per cent. The critical one-year benchmark deposit rate was also trimmed by a quarter percentage point. Both changes will be effective from Saturday.
The central bank was at pains to explain that the Chinese economy was still growing at a “reasonable speed” – an echo of numerous other statements from senior Chinese leaders in recent months. China’s annual growth dribbled down to 7.3 per cent in the third quarter, its lowest level in more than five years.
The comment was designed to dampen expectations of any more aggressive efforts to stimulate growth. By many measures, China has still not absorbed or expunged the distortions of the record-breaking bank lending spree deployed in 2009 to protect the economy from the global financial crisis.
Even as the economic picture has darkened for China, Beijing has played down speculation that it would unleash anything more than small-scale, tightly-targeted stimulus measures.
The central bank’s move comes amid concerns that the country’s financial system is becoming increasingly tight as a source of credit. Hours before the rate cuts were announced, traders said that the People’s Bank had added about $8 billion in short-term funds to the banking system to offset a cash outflow arising from a number of recent share issues.
The interest cut also follows a slew of comparatively weak-looking data from China and warnings from many analysts that the country might miss the government’s forecasts for 7.5 per cent GDP growth for 2014.
While that might not in itself be a disaster for China – particularly while the employment rate remains stable – the feared slowdown for the world’s biggest consumer of most commodities has driven a worldwide dip in energy and metals prices.
As word of the rate cuts, and the possibility of a year-end jump in China’s economic fortunes filtered into commodity trading floors in London, metals prices rose. Copper, whose price often echoes data from China’s construction sector, rose to a session high of $6,748 per tonne moments after the central bank’s announcement.
Economic data earlier this week left markets unconvinced that China’s woes were over, or even that Beijing’s stimulus measures were having much effect.
House prices fell by 2.6 per cent in October on high inventories and a growing sense that property may not represent the store of value that many believed. That data followed news of a slowdown in foreign direct investment, even as China approaches the end of a record year.
Thursday brought grim word from the all-important manufacturing sector: a “flash” version of the monthly purchasing manager’s report by HSBC saw the index fall to a six month low of 50.0 – just on the cusp of the level that would denote contraction.
The Times
