China chases growth amid global slowdown

A woman waits for customer at a booth selling children’s clothing at the Wangfujing shopping district in Beijing

China’s central bank unexpectedly slashed interest rates on Friday to re-energize the world’s No. 2 economy, joining a growing list of major economies that are trying to encourage growth in the face of a global slowdown.
The president of the European Central Bank said Friday he was ready to step up stimulus for the 18-country Eurozone economy, where growth is meager and unemployment is soaring. And Japan’s government last week delayed a tax increase after the country slipped back into recession. Japan’s central bank late last month increased its purchases of government bonds and other assets to try to revive growth.
Of major economies, only the U.S. is considering raising interest rates. The Federal Reserve only recently ended a massive bond-buying program that helped reduce market interest rates because the economy is strengthening.
With the world’s second-largest economy on track to record its weakest annual growth since 1990, the People’s Bank of China said it is trying to address “financing difficulties” caused by a shortage of credit. It also said the move was not a change in monetary policy and economic conditions are within an “appropriate range.”
China’s economic growth fell to a five-year low of 7.3 percent in the latest quarter and manufacturing and other indicators are declining. That has prompted suggestions Beijing might intervene to prop up growth.
The rate charged by banks for loans to each other rose last week to its highest level since early October, reflecting reduced availability of credit, a concern for Chinese economic planners.
“If necessary, the central bank will provide timely liquidity support,” or extra credit to markets, it said in a separate statement.
The bank cut the rate on a one-year loan by commercial banks by 0.4 percentage points to 5.6 percent. The rate paid on a one-year savings was lowered by 0.25 point to 2.75 percent.
It was the first rate cut since July 2012, and comes after the Cabinet called last week for steps to reduce financing costs for industry to make the economy more efficient.
Jay Bryson, a global economist at Wells Fargo Securities, said the bank’s move would have only a limited impact on China’s economy. But it does signal that Chinese officials’ concerns about growth are rising, he said, a sign they may take further steps in the coming months.
In China, changes in interest rates have a limited direct effect on the government-dominated economy but are seen as a signal to banks to lend more and to state companies that they are allowed to step up borrowing.
“The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks,” said Mark Williams of Capital Economics in a report. Most of China’s private companies cannot get loans from the state-owned banking industry and rely on an underground credit market.
“This does not necessarily signal that policymakers are going back on efforts to support smaller companies, or giving up on ‘targeted easing,’ but they apparently feel larger firms are now in need of support too.” Joe McDonald, Business Writer, Beijing, AP