The Chinese government remains focused on jump starting growth in its sputtering economy and continues to make moves toward financial reform. But in a statement which seemed to be backtracking somewhat from previous comments, Premier Li Keqiang stated Saturday that he had never said that China’s economy must grow seven percent this year. To prove his point, the government cut interest rates once to a low 4.35% from 4.6% to take effect Saturday.
China cut interest rates for the sixth time in less than a year on Friday, another aggressive move implemented by the world's second-largest economy since the 2008/09 global financial crisis.
Keqiang’s comments come ahead of a crucial meeting set for this week that is to outline economic and social targets for the next five years and coincide with remarks by a top central bank official, who said that there is no doubt that China has the ability to maintain an annual economic growth at around 6-7 percent over that period.
6th Rate Cut
China cut interest rates for the sixth time in less than a year on Friday, another aggressive move implemented by the world's second-largest economy since the 2008/09 global financial crisis. The interest rate cut followed a report that growth in the country is expected to slip to a 25-year-low this year of under 7 percent and that an easing of monetary policy would dampen deflationary pressures.
The People’s Bank of China (PBOC) said that the rate cut, as well as the reduced amount of cash required by banks to be held in reserves and the elimination of the ceiling on deposit rates, was in line with the current economic situation and would help support the country’s real economy. The one-year deposit rate was set at 1.5 percent from 1.75 percent while reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions
The PBOC added that low inflation in general was beneficial for introducing these moves.
Generally, lowering interest rates tend to stimulate borrowing by consumers and businesses and is a move put into place in order to contain a slowdown. However, analysts are concerned that another cut would run the risk of increasing debt and warn that China is in danger of having a financial crisis.
China's economy has grown at an average annual rate of 10% for the past three decades, but has been cooling down in the past few years. Last year it grew by 7.4%, which is extraordinary by Western standards, but showed a growth of only 6.9 percent in the July-to-September quarter from a year earlier.
The interest cut was introduced ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.
China’s reduction to record-low rates and anticipated stimulus in Europe and Japan add to monetary policy divergence with the U.S., where the Federal Reserve is considering its first rate increase in nine years.
But economists view China’s rate cut as having “mixed implications for U.S. monetary policy.” While the interest rate cuts reduce downside risks for Chinese and global growth and should increase the Fed’s confidence that the U.S. economy will be able to absorb higher interest rates, should today’s rate cut spur a new round of depreciation of the Chinese currency, it would make it that much more difficult for the Fed to raise interest rates before the end of 2015.