On December 22, 2008, the People's Bank of China (PBC) lowered the key interest rates for the fifth time in the last three months, in a hint that the world's fastest growing economy might be slipping down for the first time in decades, affected primarily by the recent global financial crisis. The Chinese apex bank trimmed both the one-year benchmark lending rates by 0.27 percentage points and also pruned the reserve requirement ratio for financial institutions by 0.5 percentage points as a part of its move towards implementing a `moderately loose' monetary policy.
The twin rate cuts, which aim to lower the cost of bank loans, are the first of its kind in the last six years since February 2002. The rate cuts implemented by the central bank, however, are not all that surprising given that official statistics projected a grim scenario for the Chinese economy, which grew at its three-year lowest rate of 9% in the Q3 2008, and that a World Bank forecast suggested a much lower growth of 7.5% (lowest in the last two decades) in 2009, down from 9.4% in 2008, driven by weak exports, which headed south for the first time in the last seven years since June 2001, as international demand weakened.
Nevertheless, some experts felt surprised at the swiftness at which these rate cuts were implemented. "We all knew that there would be a monetary policy relaxation in China, but we didn't expect the move would be so quick," Gao Huiqing, Economist at the State Information Centre, a government think-tank in Beijing, was quoted as saying by Bloomberg.
China embarked on a rate cut spree in September 2008 for the first time in six years. So far, it has lowered interest rate by 216 basis points, including a cut of 108 basis points on November 26, the biggest in 11 years. The interest rate and reserve requirement cuts are decisive at a time when the Consumer Price Index (CPI), which was at a 12-year high in February 2008, dropped to 2.4% in November, thus giving the authorities enough scope for further rate cuts. The country has also gone for a 17% increase in the 2009 M2 money supplythe broadest measure for the nation's money supply that includes cash in circulation plus all deposits and upped bank loans by more than 100 bn yuan (US$14.6 bn) over 2008 levels. China's M2 money supply growth target for 2008 was 16%. "(China's) Monetary policy is now all about freeing up funds to be lent to government-backed investment projects, as well as driving down borrowing costs," said Stephen Green, an Economist with Standard Chartered Bank. |
