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The People’s Bank of China, China’s central bank, followed its surprise benchmark interest rate cut of last month with another cut on July 5th, as it lopped 31 basis points off its lending rate and dropped it to 6 percent. The benchmark rate had stood at 6.56 percent prior to the initial cut a month ago. The latest interest rate cut came on the same day the European Central Bank lowered its rate to 0.75 percent, which is a record low. The European cut came in response to more troubling economic numbers in the region, and there are suggestions there will be more moves in the offing on the continent.

Analysts are unsure what to make of the timing of Beijing’s announcement on China’s interest rate cut, though there are some suggestions that policy makers want to have their action seen as being in concert with the eurozone move. If nothing else, the Chinese rate cut shows that along with the major European move, China is moving decisively to respond to the sluggishness in the global economy which has affected its domestic prospects as well. As GDP numbers and second quarter economic data were due to be released for China, some observers have also suggested that Beijing wants to get ahead of what is likely to be more data confirming the slowdown in its economy.

The Larger Effort

Despite the massive problems in the eurozone, the ECB is attempting to apply remedies without exhausting all of its arsenal at once. It has delayed more bond buying, as it apparently will hold that measure in reserve. Some eurozone members are acting with additional measures. The UK has already lowered its interest rate to 0.5 percent and will be printing 50 billion more British pounds, the equivalent of $78 billion in new money to stimulate its economy.

In China, policy makers in Beijing have been trying to loosen the lending strings on the big banks by slashing the reserve requirement ratio (RRR) and encouraging loans to small business and consumers, while at the same time trying to keep the overheated property sector blunted from any more excesses. Beijing has also been consistent in its message, explicitly stating that it does not intend to undertake the massive stimulus such as the $635 billion it poured into its economy in the wake of the 2008-2009 global financial crisis. That stimulus in part is still being worked off in the property sector.

The State Of Things

China’s growth has slowed and the upcoming data to be released is expected to show still slowing GDP growth. The question is, by how much? There is the caution that below a 7 percent annual GDP growth rate, layoffs and some increase in unemployment would be felt in China, something policy makers wish to avoid. Estimates for GDP growth, even prior to the two benchmark interest rate cuts, though, have most analysts seeing GDP for 2012 in the mid seven percent range if not higher.

China’s Strategy Differs

The Bank of England has been pumping in freshly minted pounds, the equivalent of hundreds of millions of dollars into its economy, as it has tried to stem the economic slowdown. The US Federal Reserve has had its bond buying program of quantitative easing also, with what most analysts agree are minimal effects. While Beijing has been concerned about its money supply, it is concentrating on its interest rates and measures to get banks lending again, although the government wants to be sure that credit is available in the sectors of the economy that need it. Sheng Nan, an analyst at China Construction Bank’s investment division in Hong Kong, suggested in a Reuters’ article that the quickest way to achieve this would be to allow the loan-to-deposit rate for bank lending to be raised. He also pointed out that such a policy carries the risk that such lending could become overdone. So Beijing is for the present pursuing a more conservative policy that would steer the banks to lend to the smaller, private sector firms that create jobs. By Beijing pursuing a policy of encouraging lending in this direction, it’s targeted where the need is felt to be greatest.

More To Be Done

There was no statement out of Beijing from the policy makers that the interest rate cut was the end of things. The ongoing nature of the way in which the eurozone problems have worked their way deeply into the world economy prevent any such conclusion. Still, Beijing is maintaining a cool approach and trying to apply prudent action to ensure that growth will continue, and even though difficult, things will stay manageable.
 

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst