China Steps on the Economic Accelerator

The People’s Bank of China (PBOC), the country’s central bank, announced a surprise cut to its benchmark interest rates today. This is the second cut in a month, and underscores just how concerned Chinese officials are with the country’s slowing economy.

China’s announcement coincided with the announcement by the Bank of England that it was maintaining its bank rate steady at 0.5%, but increasing its asset purchase program by £50 billion to £375 billion. The European Central Bank (ECB) has also announced a number of interest rate changes this morning, including a cut of its policy rate to an all-time low of 0.75% and a deposit rate of 0%.

In China, the benchmark rate on 6-12 month debt was cut by 31 basis points and 1-year deposit rates were cut by 25 basis points. Chinese economic data has been weakening and the PBOC’s moves are intended to stimulate lending in an effort to regain some economic momentum.

The latest manufacturing PMI number from China indicated that the economy is contracting as inventories increased and new orders fell the most in seven months.

The PBOC is also expected to lower the reserve requirements ratio for the country’s lenders in another effort to juice up lending. Lenders are due to make another deposit to their reserve funds today, but a cut to the requirement is likely by next month. Lending by the country’s four largest banks was lower in June than in May, and total lending by all the country’s banks is expected to fall short of the government estimate of 8-8.5 trillion yuan ($1.26-$1.34 trillion) for 2012.

China had planned to reduce its growth rate in 2012 because the government expected the global economy to improve. That hasn’t happened, and the slowdown elsewhere has added to the planned Chinese slowdown. So the government has decided once more to put its foot on the economy’s accelerator.

Paul Ausick