The People’s Bank of China (PBOC) in Beijing, capital of China. File photo courtesy of PBOC.
China’s leadership and its Central Bank, the People’s Bank of China (PBOC), are ready to cut interest rates again in addition to loosening lending restrictions amid concerns that falling prices may trigger a surge in debt defaults, business failures, and job losses, according to Reuters, citing sources involved in policy-making.
On Friday the PBOC made an unexpected cut in rates, which was the first rate cut in over two years.
The PBOC move reflects a shift in course by Beijing and the Central Bank, whom have persisted with modest stimulus measures prior to finally deciding last week that a bold monetary policy step was needed in order to stabilize the world’s second-largest economy, Reuters said.
Economic growth in China has slowed to 7.3% in the third quarter of 2014 and policymakers feared that it was on the verge of falling to below 7% – a rate which hasn’t been seen since the global financial crisis.
“Top leaders have changed their views,” said a senior economist at a government think-tank whom is involved in internal policy discussions told Reuters. The economist declined to be named.
According to the report, the economist told Reuters that the PBOC had shifted its focus toward broad-based stimulus and were open to more rate cuts in addition to a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital that is available to fund loans.
“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the economist told Reuters.
The rate cut on Friday arose from concerns that local governments are struggling to manage high debt burdens amidst reforms to their funding arrangements, the sources told Reuters.
A number of Chinese economists have been making calls for bolder policy steps, as recent data has showed that the Chinese economy is losing more steam in the fourth quarter of 2014 and that consumer price inflation is falling.
China’s full-year 2014 growth is on track to fall short of the government’s 7.5% growth target and mark the weakest expansion in 24 years, according to Reuters.
“GDP growth is near 7% which is at a dangerous level given it could still go even lower due to structural reforms,” Li Xunlei, Chief Economist at Haitong Securities told Reuters.
China’s leaders are also worried that a sharp economic slowdown could hurt employment and undermine public support for reforms, Reuters said.
“Employment still holds up now, but it will definitely be affected if growth slows further,” a senior economist at a top government think-tank told Reuters.
Beijing wants to push through some painful reforms in 2015, including fiscal reforms to deal with a mountain of local government debt, and the risk of pushing local governments into defaults could be offset by lower interest rates, Reuters said.
Late Friday night following the rate cut, Chinese Premier Li Keqiang called for new economic growth dynamism and “new growth engines”.
China should help people to set up businesses and quicken the development of new business models, Li said.
Li encouraged Chinese manufacturers to expand globally and to roll out more “Created-in-China” products and services.
The Premier also urged policy efforts to aid small and mid-sized banks in addition to bolstering the development of the Yangtze River economic belt that covers nine provinces.
Source: Reuters
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