World looks to China to act as circuit break for crisis it ignited

CHINA’S central bank, which helped trigger a market rout with a surprise devaluation two weeks ago, may be the only one around the world with the firepower to arrest it.

With about 25 trillion yuan (R52 trillion) of bank deposits still locked up as reserves and the benchmark one-year interest rate at 4.85 percent, the People’s Bank of China (PBOC) has an ample monetary policy arsenal at its disposal.

Lending rates in the US, Europe and Japan already are close to zero and the rout is shaking confidence that the global economy will be strong enough to withstand an expected increase in US rates.

More than $5 trillion has been erased from the value of stocks worldwide since China’s surprise devaluation of the yuan on August 11, which deepened concerns over a malaise in the world’s secondbiggest economy. A global selloff in riskier assets quickened yesterday as commodity prices dropped to a 16-year low and emerging market currencies weakened. Chinese stocks plunged the most since 2007.

“The PBOC is the last major central bank that still has some ammunition left that could help to stimulate global growth,” said Rajiv Biswas, the Asia-Pacific chief economist at IHS Global Insight in Singapore. “The Chinese government also has some fiscal headroom for more fiscal policy stimulus measures.”

The case for policy easing is rising in China with a prelimi- nary manufacturing gauge for August falling to the lowest in more than six years last week. That followed weaker-thanexpected data on investment, industrial output, retail sales and exports last month.

Policymakers’ efforts to underpin growth have yet to avert the slowdown, threatening Premier Li Keqiang’s expansion target of about 7 percent for this year.

Measures so far have included four interest rate cuts since mid-November, a debt swap programme to ease financing pressure on local governments, and funds injected into policy banks to channel credit to the real economy.

A “circuit-breaker policy easing” needed to come from China to end negative feedback coursing through global currency and share markets, said Shane Oliver, the head of investment strategy at fund manager AMP Capital Investors in Sydney.

He expects China to cut the benchmark lending rate to 4 percent from 4.85 percent by the end of the year.

“Significant interest rates and reserve ratio cuts in China would be enough to soothe current jitters and head off the threat to Chinese and global growth,” he said. “It is the only major country that has firepower to cut interest rates and its banks’ reserve ratios and it is the only major central bank that really needs to undertake major monetary easing.” – Bloomberg