RE­VIV­ING THE CHI­NESE DRAGON

Cen­tral bank’s cut of lend­ing rate to 5.6% will boost growth rate

The Star Early Edition - - BUSINESS REPORT - Kevin Yao

CHINA’S lead­er­ship and cen­tral bank were ready to cut in­ter­est rates again and also loos­ened lend­ing re­stric­tions, con­cerned that fall­ing prices could trig­ger a surge in debt de­faults, business fail­ures and job losses, said sources in­volved in pol­i­cy­mak­ing.

Fri­day’s sur­prise cut in rates, the first in more than two years, re­flects a change of course by Beijing and the cen­tral bank, which had per­sisted with mod­est stim­u­lus mea­sures be­fore fi­nally de­cid­ing last week that a bold mon­e­tary pol­icy step was re­quired to sta­bilise the world’s sec­ond­largest econ­omy.

Eco­nomic growth has slowed to 7.3 per­cent in the third quar­ter and pol­i­cy­mak­ers feared it was on the verge of dip­ping be­low 7 per­cent – a rate not seen since the global fi­nan­cial cri­sis. Pro­ducer prices, charged at the fac­tory gate, have been fall­ing for almost three years, pil­ing pres­sure on man­u­fac­tur­ers, and con­sumer in­fla­tion is also weak.

“Top lead­ers have changed their views,” said a se­nior economist at a gov­ern­ment think tank.

The economist, who de­clined to be named, said the Peo­ple’s Bank of China had shifted its fo­cus to­wards broad­based stim­u­lus and was open to more rate cuts as well as a cut to the bank­ing in­dus­try’s re­serve re­quire­ment ra­tio (RRR), which ef­fec­tively re­stricted the amount of cap­i­tal avail­able to fund loans.

China cut the RRR for some banks this year, but has not an­nounced a bank­ing-wide re­duc­tion in the ra­tio since May 2012.

“Fur­ther in­ter­est rate cuts should be in the pipe­line as we have en­tered into a rate-cut cy­cle and RRR cuts are also likely,” the think tank’s economist said.

Fri­day’s move, which cut one-year bench­mark lend­ing rates by 40 ba­sis points to 5.6 per­cent, also arose from con­cerns that lo­cal gov­ern­ments were strug­gling to man­age high debt bur­dens amid re­forms to their fund­ing ar­range­ments, the sources said. Top lead­ers had been re­sist­ing a rate cut, fear­ing it could fuel debt and prop­erty bub­bles and dent their re­formist cre­den­tials, but were even­tu­ally swayed by signs of de­te­ri­o­rat­ing growth as the prop­erty sec­tor cooled.

Un­til then, they had per­sisted with tar­geted pol­icy steps, such as cuts in re­serve ra­tios for se­lected banks and liq­uid­ity in­jec­tions into the bank­ing sys­tem. But th­ese failed to bring down bor­row­ing costs for the cor­po­rate sec­tor.

“In­creas­ing liq­uid­ity by the cen­tral bank has failed to lower bor­row­ing costs for the real econ­omy,” said a for­mer cen­tral bank re­searcher who now works for the gov­ern­ment.

“Em­ploy­ment still holds up, but cor­po­rate prof­its have been squeezed as pro­ducer price de­fla­tion bites, and it’s un­rea­son­able for banks to have hefty prof­its.”

Many Chi­nese econ­o­mists had been call­ing for bolder pol­icy ac­tions, as re­cent data showed the econ­omy los­ing more steam in the fourth quar­ter and con­sumer price in­fla­tion fall­ing. Full-year growth is on track to un­der­shoot the gov­ern­ment’s 7.5 per­cent tar­get and mark the weak­est ex­pan­sion in 24 years.

“GDP [gross do­mes­tic prod­uct] growth is near 7 per­cent which is at a dan­ger­ous level given it could still go even lower due to struc­tural re­forms,” said Li Xun­lei, the chief economist at Haitong Se­cu­ri­ties. “The rate cut helped boost con­fi­dence in next year’s growth out­look,” said Li, who was among econ­o­mists who dis­cussed pol­icy is­sues with Premier Li Ke­qiang re­cently.

Gov­ern­ment think tanks, which make pol­icy pro­pos­als, have urged Beijing to cut its eco­nomic growth tar­get next year, prob­a­bly to about 7 per­cent, from around 7.5 per­cent this year.

The lead­er­ship is due to map out eco­nomic and re­form plans for next year at a work con­fer­ence next month, in­clud­ing eco­nomic tar­gets which will be un­veiled in par­lia­ment in March. China’s lead­ers also wor­ried that a sharp eco­nomic slow­down could hurt em­ploy­ment and un­der­mine pub­lic support for re­forms.

The cen­tral bank does not have the fi­nal word on ad­just­ing in­ter­est rates or the value of the yuan. The ba­sic course of mon­e­tary and cur­rency pol­icy is set by the State Coun­cil, China’s cab­i­net, or by the Com­mu­nist Party’s rul­ing polit­buro. – Reuters

PHOTO: BLOOMBERG

Peo­ple use ATMs at an In­dus­trial and Com­mer­cial Bank of China. Fri­day’s move, which cut one-year bench­mark lend­ing rates by 40 ba­sis points to 5.6 per­cent arose from con­cerns that lo­cal gov­ern­ments are strug­gling to man­age high debt bur­dens.

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