China cuts interest rates as slowdown fears mount

Publish date : 1 March, 2015

KATHMANDU, March 1: China cut benchmark interest rates on Saturday for the second time in three months as worries mount over slowing growth and the threat of deflation.

The People’s Bank of China, the central bank, cut the benchmark one-year lending rate by 25 basis points to 5.35 per cent and the one-year benchmark deposit rate by the same amount to 2.5 per cent on Saturday night, effective from midnight.

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The PBoC cut rates for the first time in more than two years on November 22 but many Chinese analysts and policy makers have been calling for further monetary easing as growth continues to slide and deflation looms.

Chinese producer prices have been falling for three years, the longest period on record, and the consumer price index, the main gauge of inflation, rose just 0.8 per cent in January from a year earlier, the weakest pace since November 2009, in the aftermath of the global financial crisis.

“In recent months the scale of consumer price increases has come down and the scale of producer price falls has widened and this has had the effect of pushing up the level of real interest rates,” the PBoC said by way of explanation as it announced the cut.

China overtook the US as the world’s biggest economy in purchasing power terms last year but it also grew at its slowest pace in nearly a quarter of a century — by 7.4 per cent.

China’s enormous manufacturing sector shrank for the second month in a row in February, according to the official purchasing managers’ index, which was released Sunday.

The government PMI came in at 49.9 in February, up very slightly from January’s 49.8 reading but still below the 50-point level that separates growth in the sector from contraction.

January’s reading was the worst in 28 months, contributing to the broader picture of a worsening slowdown in the economy.

Most analysts and economists predict growth will continue to slide this year, led by the downturn in the previously overheated real estate market.

The average transaction price of housing fell 3.84 per cent in 100 major Chinese cities in February from a year earlier, according to data released on Saturday by the China Index Academy, a top property research institute.

With much of the world mired in sluggish growth and energy prices tumbling, many economies are flirting with deflation, particularly in Europe and Japan.

Last week, central bankers from the eurozone and Japan voiced optimism that their policies of quantitative easing and currency depreciation would be successful in staving off outright deflation.

Meanwhile, in her semi-annual testimony before the US Congress last week, Federal Reserve chairwoman Janet Yellen expressed concern over deflation, saying the Fed would only move to raise interest rates when inflation moved back above its target of 2 per cent.

Ms Yellen singled out a bigger slowdown than anticipated in China as a key risk to the outlook for US economic growth.

Analysts said the latest Chinese interest rate cuts were unlikely to have a big impact on China’s continuing slowdown, in part because much of the money being lent today is being used to roll over the enormous existing debt load built up in the past few years.

The rise of a huge and barely regulated shadow banking system over the same period also means adjustments to formal benchmark rates do not necessarily have the same impact they once did.

“A large proportion of loans are still priced off the benchmarks, so the direct impact will be to lower financing costs for bank borrowers, which are disproportionately larger and state-owned firms,” said Mark Williams, chief China economist at Capital Economics. “We are not convinced . . . the reduction in deposit benchmarks will lower financing costs through the financial system and help lower interest rates more generally.”