Jim Trippon on June 11, 2012: China’s central bank, The People’s Bank of China, cut the one-year borrowing interest rate 25 basis points, from 6.56 percent to 6.31 percent, on Thursday, June 7th. Along with this cut, the central bank cut the one year deposit rate also by 25 basis points, to 3.25 percent. China’s policy makers had been easing with other measures, but had thus far resisted moving the benchmark interest rate. This was the first rate cut since 2008, during the global financial crisis. The rate cut was initially viewed with optimism by investors, but second thoughts about the move foreshadowing worsening data overcame this initial hope. The rate cut was considered a surprise mostly because China’s policy makers hadn’t talked about such a move, but more so because the talk from Chinese leadership had been about fiscal measures with hints of other more pressing monetary concerns, chiefly money supply, along with other indications of concern over credit availability. Still, the benchmark interest rate cut was always there in the policy makers’ bag of remedies, and Beijing made it clear they were not going to sit idly by if the economic data continued to worsen. A Global Indicator? Many observers took the China’s interest rate cut as a sign that more– and major– stimulus moves would be on the way from the world’s leading economies. The pall which Europe has cast over global growth remains a factor not only in slowing the world’s economies, but the growing pessimism about whether the EU will be able to successfully restrict the damage from its failing member economies, and the possible drastic measures it may need to enact to save them, is having its effect on global investor sentiment as well. China isn’t immune to this, either. The Asian markets were in the worry mode about China, the bellwether economy in their region, while global observers awaited May economic data for China. Where Is Inflation? April inflation was 3.4 percent, and May data was expected to show 3.2 percent inflation in China. Although those outside China often misread the actions and intentions of Beijing’s policy makers, the expectations that observers had that China was still concerned with inflation, which it has largely successfully battled, were based on signals from China’s leadership itself. The specter of a sudden re-ignition of too-rapid growth has been on the minds of policy makers, thus they didn’t broadcast anything about a coming benchmark rate cut. Given the experience of inflation that occurred coming out of the global recession of 2008 and 2009, this fear seemed reasonable by Beijing. So while observers were duly surprised by the rate cut, it’s assured that the cut isn’t something the policy makers entered into lightly. A lower consumer price index in the coming months was no doubt anticipated by Chinese leadership, which would presage further slowing. China, despite what its critics maintain, has tried to get in front of recent economic developments yet without overreacting. In addition to the rate cut, the central bank has instituted a relaxing of the banking rules to allow the banks greater autonomy and flexibility in determining lending and deposit rates. This will allow the banks to be more competitive, a long-term structural change sought by Beijing. Growth Expectations Data soon to be released is expected to show the sixth consecutive quarter of contracting growth for China’s GDP. A Reuters poll of analysts came up with a forecast of 7.9 percent for the second quarter. Although this is a relatively weak number for China, given its 10 percent and 9 percent annual GDP growth rates for the last couple of years, it still stands in stark contrast to the developed world’s meager growth of 1 percent or 2 percent in the US, and the negative growth or recession underway in Europe. The moves China is making on the interest rate front may shore up growth, especially as we move through the year, to keep the annual GDP growth rate from actually falling much below 8 percent On The Horizon Beijing is at least both vigilant and active concerning policy measures. It should be pointed out that China doesn’t have the impediment of having to clear its decisions within a contentious framework of several competing members, as the EU does. That said, critics have underestimated just how proactive on economic policy China can, and has demonstrated, it will be. Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Index (NYSEARCA:EEM), Vanguard Total Stock Market ETF (NYSEARCA:VTI).
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