China Cuts rates

Last Friday China’s central bank surprised the world by cutting its interest rates for the sixth time since November, to help jumpstart its slowing economy. The lending rate was lowered 25 basis points to 4.35%, the deposit rate was also cut 25 basis points to 1.5%, and the reserve requirement ratio was cut by 50 basis points to 17.5%.

China hopes these measures will help it achieve its growth target of 7% for 2015, but this decision suggests that the slowdown might be graver than told. Official reports say otherwise, suggesting a very moderate weakening in the third quarter, yet Beijing’s economic data is widely considered to be unreliable, with some economic analysts suggesting that the real growth rate might be as low as 3%.

China’s economy grew at an annual rate of 10% for the last 30 years, but has been cooling recently, approaching a more sustainable rate of growth closer to Western standards, yet the question remains: Can that transition be made smoothly?

Cheaper money usually stimulates borrowing, which will increase domestic consumption and alleviate debt concerns, helping to stabilize China’s economy and restoring its growth momentum. Regarding the oil market, this suggests that there will be greater demand by China, which might lead to an uptrend in oil prices for the next few months. This decision may also benefit other commodities, since China is one of the biggest importers of natural resources and metals.

However, given the country’s far from open capital account, the effect of this rate cut on the world economy is far from clear, in contrast to the USA and EU, where any liquidity increase normally spills over to foreign countries.

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Reuters: Business News