Our Opinion: 2014
Is a Chinese soft-landing possible?
Aaron Back in the Wall Street Journal recently said that China’s central bank had served up “a dish of stimulus with a side order of banking reform.”The People’s Bank of China recently cut interest rates for the first time in two years. The unexpected move lifted stock and commodity markets. The benchmark one-year lending rate has been cut by 0.4% to 5.6%, whilst the 12-month deposit rates fell a quarter point to 2.75%.
China’s economy has slowed sharply in the past few years. The authorities are trying to engineer a soft landing after a credit and property bringe. As a result, China could miss its annual growth target – 7.5% this year – for the first time since the Asian crisis in the late 1990s. The authorities also want to encourage households to consume more, rather than encouraging economic growth through building infrastructure.
Some central-bank members resisted the cut says Alex Frangos in the Wall Street Journal. They thought it would undermine the “broader reform agenda” of waning China off credit-fuelled growth. But “short-term growth concerns have won out.” In any case, this rate cut is unlikely to re-inflate the credit bubble. The important point is that interest rates have become too high for companies trying to pay down their debts. Producer price inflation has turned negative, adding to the burden of corporate debt (where prices – and, therefore, income – falls, debt gets harder to service because interest payments are fixed. For many firms, the real financing costs have crept up above 8%. Lower rates will allow them to rearrange their loans at cheaper rates, making it easier to repay their debts.
But there is unlikely to be a surge in overall lending, due to strict quotas and loan-to-deposit ratios governing the amount banks can lend out. Unless these are relaxed, there will be little impact on growth, says Capital Economics – which the Central Bank seems quite happy about. So, the main impact of the cut will be to improve the financial position of large firms.