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Drastic monetary easing

(China Daily)
Updated: 2008-11-28 07:46

The most aggressive interest rate cut in a decade indicates that the People's Bank of China has come to terms with the huge impact the ongoing global financial crisis and economic downturn will exert on the Chinese economy.

China's central bank announced on Wednesday a massive cut of 108 basis points that brings loan and deposit rates down to 5.58 percent and 2.52 percent respectively.

As the fourth reduction in interest rates since September when the first signs of a sharp slowdown began to appear, the latest move has made clear Chinese authorities' concerns about the rising risk of a growth slump and deflation.

By departing from the previous piecemeal rate hike or cut of only 27 basis points to finetune the economy, the central bank has decisively taken drastic measures commensurate with the scale of the challenges China faces at home and abroad.

For pessimists, the move can be interpreted as the latest indication that the Chinese economy may be cooling much more quickly than had been previously expected due to a weak housing market and declining demand for exports.

China's annual economic growth rate already slowed sharply to 9 percent in the third quarter, from 10.4 percent in the first half of the year. And some believe activity could decelerate even more sharply in the coming months, given that the impact of recession in developed countries and the slowdown in many emerging economies has just begun to hit Chinese exporters.

However, for optimistic observers, the latest monetary easing, the biggest interest rate cut since 1997 when the country was troubled by the Asian financial crisis, shows that Chinese policymakers have finally come to firm grips with the current economic predicament.

Slashing the interest rates by a massive 1.08 percentage points and lowering reserve requirements for banks by at least 1 percentage point will considerably jumpstart capital investments, boost housing sale and propel domestic consumption.

More important, the monetary easing will strengthen the hands of the Chinese government which has just launched a 4-trillion-yuan ($586 billion) fiscal stimulus package to prevent a hard landing of the economy.

Only when China's fiscal stimulus and monetary easing work together can the economy be effectively steered out of trouble against a background of global turmoil. Besides, these measures will also weigh heavily on the worldwide collective efforts to stave off a rapid slowdown of the global economy.

(China Daily 11/28/2008 page10)