China Unexpectedly Cuts Interest Rates to Help Revive Growth

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The Chinese central bank, People’s Bank of China, decided to cut interest rates unexpectedly on Friday, as the Chinese economy continues to see slower and slower expansion rates.  This is the first rate cut in two years, which came just days after Manufacturing PMI came out at 50.0, .01 away from showing that there is a contraction occurring in manufacturing, very bearish for China’s economy.

Additionally, real estate markets have died down to a whisper and there is a lack of demand for basic building materials.  Investors have been worried and positioning for a Chinese economic slowdown for some time now, as government reports and economic activity continue to remain at sluggish levels.  Chief market analyst at IG, Alexandre Baradez says that with this interest rate cut, China’s central bank is now following a similar path that we have seen from the US Fed, Bank of Japan, European Central Bank, etc.  One year lending rates fell 40 basis points and now show up at 5.6%, and one year deposit rates were cut 0.25% to 2.75%.

People's Bank of China

China’s central bank releasing short term loans to banks

China watchers were beginning to realize more and more that there would have to be some sort of government spark that helped revitalize growth and prevent a downturn from occurring.  Analysts certainly did not see the rate cut as an option in today’s meeting, but rather was expecting a lighter approach such as increased government spending.  Additionally, the central bank attempted to keep economy stable with releasing short term loans to banks to help encourage banks to lend more, despite rising bad loans on their balance sheets.  Despite being forecast to grow 7.4% this year, this year will be the weakest growth China has had in 24 years.

I think there is a lot more fear in the global economy than people realize.  The ECB opened the door to QE this morning, China cuts interest rates, Fed worries of rising rates, unemployment, and the list goes on.  There are many more factors in the world economy that have investors’ attention, which was not the case even just several months ago. Weakening data out of Japan, Europe and China has been very disgruntling and certainly has led to fears of the beginning of another worldwide slowdown.

While we are not there yet, it is important to remember that there is a lot of moving parts to the world economy and if one section is affected, it spreads slowly to other countries and soon we have chain reaction events occurring.  Next Tuesday, we have preliminary GDP numbers from the US and this could be a big indicator of economic health for the US, and certainly if the number is stronger than estimates, it could ease some world economic fears.  Will all this news and government reports coming in under expectations, it is hard not to wonder if we are at a crossroads of the next economic slowdown.

Lindsey M. Piegza, Chief Economist, Sterne Agee noted in a research note today:

Partly in response to a slowing domestic economy thanks to a weak housing market and massive amounts of bad loans, and in part because of a tepid international economy undermining manufacturing and the country’s external sector, the People’s Bank of China lowered the one-year deposit rate by 25bps to 2.75% and reduced the one-year benchmark lending rate from 6% to 5.6%. Action was in part expected as the latest growth report out of China showed a 7.3% increase in Q3, the slowest rate in five years.

Disclosure: None

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