The New York Times reported yesterday that China has decided to accelerate its easing program due to low export trade figures. China reduced their one year lending rate by 25 basis points to 5.1 percent and its one year deposit rate 25 basis points to 2.25 percent.
Over recent years China has been growing in double digits, however in the first quarter this year it has only grown 7%. This stirs up a lot of opinions on China's economic welfare in the coming future. While this is the number that China was targeting, economists argue that this could create huge disruptions in the economy.
The choice to accelerate quantitative easing is also stirring up varying opinions. Some say that these interest rate cuts will serve to increase business lending and facilitate growth in the economy. On the other hand however:
"But an ever-growing body of downbeat economic statistics has prompted other economists to worry that Chinese policy makers now face an unappetizing choice. They can continue to cut interest rates and bank reserve requirements in a bid to stimulate bank lending and keep the economy growing fairly strongly. But that extra lending would only expand further a debt load, particularly at local governments and state-owned enterprises, that has been surging as a share of economic output ever since the global financial crisis in 2008 and 2009."
Currently the feelings are pretty mixed. What do you think? Is this sudden cut in interest rate a slippery slope? Or do you think it will prevent the downward spiral that China is attempting to avoid?
I think that China has no choice but to lower interest rates. Not doing so would most likely lead to crisis. While debt is unfortunate, in this case there is not really any other option. China just has to be careful that their lending does not cause a crisis either through poor loans or sub-prime mortgages.
ReplyDeleteWith the property market being weak and exports continuing to fall, I believe China was forced to take monetary action. I think China needs to worry about reaching maintainable growth rate and not over stretching themselves or this problem will continue to happen. As a leader in manufacturing and exporting, China needs to understand countries are still hurting from the crisis and until they have recovered China can't expect to grow at the same rates they were before 2008.
ReplyDeleteI agree with Tyler and Nolan that it is imperative for China to to reach a maintainable growth rate via monetary policy since the property and export markets are weak. Furthermore, an article published 2 weeks ago in the Wall Street Journal argued that the 7% growth rate of the Chinese government is an overestimate, which makes this issue more alarming. I think we will have to wait and see if this will improve the Chinese growth rate.
ReplyDeleteI am not surprised that China is taking a monetary action. With traditional motors of growth fizzling (real estate still experiencing a marked slowdown, exports fell sharply in April, and domestic demand are extremely sluggish etc.), this cut in interest rates was expected as China is trying to stem the sharp slowdown in its activities.
ReplyDeleteI am not surprised that China is taking a monetary action. With traditional motors of growth fizzling (real estate still experiencing a marked slowdown, exports fell sharply in April, and domestic demand are extremely sluggish etc.), this cut in interest rates was expected as China is trying to stem the sharp slowdown in its activities.
ReplyDelete