In Change of Strategy, China Cuts Interest Rate

For months, Beijing avoided broad stimulus measures, signalling that it was comfortable with the country’s slowing growth. But sliding house prices, reduced foreign investment and a flagging manufacturing sector, coupled with the continuing woes in Japan and Europe, prompted the People’s Bank of China to make a move.

“China finally admitted it has a growth problem — and that is a big step to getting the global economy back on track” - By Neil Gough, Reporter, New York Times

Below summary by Anthony O'Brien

For months, Beijing avoided broad stimulus measures, signalling that it was comfortable with the country’s slowing growth.

But sliding house prices, reduced foreign investment and a flagging manufacturing sector, coupled with the continuing woes in Japan and Europe, prompted the People’s Bank of China to make a move. The central banks cut its benchmark one-year deposit rate by 0.25 percentage points, to 2.75 percent, and reduce the one-year lending rate by 0.4 percentage points, to 5.6 percent.

Policy makers also said they would give China’s banks more leeway in determining interest on deposits.

Most immediately, the rate cuts will make financing easier for the country’s large state-owned companies, which tend to enjoy easier access to loans from the government-controlled banking sector. That will help ease China’s debt pressure, as companies find it cheaper to pay off or refinance loans that are coming due.

But the move is not without risks.

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