China rate cuts just the start as growth slows

GMT 12:54 2015 Tuesday ,03 March

Arab Today, arab today China rate cuts just the start as growth slows

Chinese GDP expanded 7.4% in 2014, its slowest pace in 24 years
Beijing - AFP

Factory employment has been falling for more than a year in the workshop of the world as Chinese growth slows, and analysts expect more intervention by the central bank after its second interest rate cut in just three months.
The weekend's rate reduction comes as authorities contend with rising deflationary threats in the world's second-largest economy and an unusually weak currency.
Communist Party leaders are seeking to prevent the growth deceleration from careening out of control.
Gross domestic product (GDP) expanded 7.4 percent last year, its slowest pace in 24 years, and recent indicators show signs the slowdown is continuing.
Slack manufacturing -- including employment declines in the sector according to surveys for banking giant HSBC -- consumer inflation plunging to its lowest in five years, three years of factory price deflation and a drop in the yuan currency have also sounded alarm bells.
The tightly controlled yuan extended declines after the rate cut, falling to its lowest level against the dollar since October 2012 on Monday.
Describing China's domestic economic situation as "bleak", Jeremy Stevens, Beijing-based Asia economist at South Africa's Standard Bank, says the People's Bank of China (PBoC) had no choice but to cut rates again.
"The manufacturing sector has contracted for the first two months of this year," he said in a report Monday, referring to official data. New home prices continue to fall and the country "is ebbing ever closer to deflation", he added.
"We are particularly worried that consumption growth presents a large downside risk for the Chinese economy in 2015," he said, adding there was anecdotal evidence employers were cutting wages to avoid redundancies, "presenting a big risk for spending".
A newspaper in the northeastern city of Shenyang reported last week that the monthly wages on offer at a migrant workers' employment fair were 300 to 500 yuan ($50 to $80) lower than last year.
- New-found urgency -
Chinese leaders say that the investment-fuelled double-digit growth of years past is no longer sustainable and they are seeking a "new normal" of gradually slower expansion led by consumer spending.
The annual session of China's Communist-controlled parliament, the National People's Congress (NPC), opens Thursday with an address by Premier Li Keqiang. He is expected to reduce the official GDP growth target for this year to around 7.0 percent, from 7.5 percent previously.
But finding the policy sweet spot is proving difficult, with the massive stimulus Beijing unleashed after the 2008-2009 global financial crisis not an option.
The PBoC announced Saturday that it was lowering benchmark interest rates by 25 basis points, or 0.25 percentage points, to 2.5 percent for deposits and 5.35 percent for lending.
The central bank cited "historically low inflation" among the factors behind the decision, which followed a reduction in November and was a clear indication of official concern.
The timing, coming at the end of the extended Chinese New Year holiday and just before the start of the NPC, "indicates a new-found degree of urgency to lower interest rates amid downward pressures on growth and inflation", RBS economist Louis Kuijs wrote in a report.
Analysts broadly expect more rate reductions and other measures to be implemented.
"Chinese policymakers have to do more and we expect them to do so," Societe Generale economist Yao Wei said in a report.
She called for a broad policy assault, including the PBoC injecting more liquidity to the banking system through further reductions in the reserve requirement ratio, the percentage of funds banks must keep on hand.
Tax cuts and spending by the central government need to be intensified, mortgage rules should be further loosened if the housing market fails to perk up and liberalisation of China's corporate sector including reform of state-owned enterprises should be accelerated, she said.
"Such a policy package is unlikely to stop the deceleration but will help China move onto a more sustainable path with less pain," she wrote.
Analysts at Barclays expressed pessimism about the overall effect of looser policy.
Monetary easing was necessary to "prevent downward growth and a deflation spiral", they said in a report, stressing they see downside risks to their 2015 growth forecast of 7.0 percent.
But they added that easing was unlikely to significantly raise growth.


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