You know the global economy is in dire straights when the Chinese are forced to cut interest rates. But if last week’s decision was greeted with surprise by many in the markets, why should it be seen that way, given Europe’s well documented woes?
It’s not as if Beijing (like the rest of us) isn’t already aware that European consumer demand for Chinese goods is headed in the wrong direction – underpinned by the undiminished propensity of many leading European politicians to adopt an economic world view through Alice In Wonderland’s Looking Glass.
Only in Europe can an agreed bailout over the weekend of up to €100bn for Spain’s battered banking sector be presented – by Spain’s prime minister no less – as a “victory for the euro”. There may be a short term sigh of relief, but with EU/IMF bailout packages for the eurozone now set to pass the 500bn euros total, where will it all end? €1trn? €2trn?
On the other hand, the headline move by The People’s Bank of China (PBOC) to reduce the one-year lending and deposit rates by 25 basis points to 6.31 percent and 3.25 percent respectively – marking the first such cuts since December 2008 – is based on a much firmer grip of reality.
Of more immediate impact is likely to be Beijing’s decision to also allow banks to offer new loans at discounts of up to 20 percent, against the previous limit of 10 percent.
In a move to boost liquidity, China last month reduced the official required reserve ratio (the proportion of depositors’ money banks must have on hand in the form of cash) to 20 percent from a record high of 21.5 percent – the third reduction in six months; but following on from six increases in 2011 when the authorities were moving to dampen down domestic inflation.
Priorities are clearly changing as the economic backdrop for China continues to be one of deteriorating fundamentals.
While domestic electricity generation – a barometer of industrial activity – was up by 3.2 percent in May, compared with a year earlier – and higher than April’s y-o-y increase of 1.5 percent – the two month period (factoring out the impact of the Chinese New Year) marked the slowest for electricity generation since Q2 2009 when many factories making goods for exports closed in response to the ongoing global financial crisis.
Imports meanwhile stalled in April against expectations of a double digit increase, while industrial output in May slowed to its lowest level since May 2009 – the manufacturing sector seeing its seventh straight monthly decline. Elsewhere, investment in fixed assets grew at its slowest pace in 11 years in Q1 2012.
The cut in borrowing costs – aside from hopes it will kick-start companies to borrow more, invest in their businesses and encourage domestic consumers to pick up the slack left by a slowdown in exports to Europe – is intended to shore up an economy heading for its slowest rate of growth in 13 years.
Chinese authorities remain sufficiently concerned about a crash in global trade of late-2008 proportions when an estimated 20m jobs disappeared from the local economy. Happy citizens after all are gainfully employed citizens. The Chinese aren’t stupid enough not to recognise that basic fact.