It’s now official, the Chinese government is very, very concerned at the health of the economy – and we in Australia should be just as concerned.
The People’s Bank of China cut the benchmark one-year lending rate by 25 basis points (0.25%) to 5.35% the one-year benchmark deposit rate by the same amount to 2.5% on Saturday night, effective from midnight.
It also followed a significant relaxing of the variable deposit ratios for larger, medium and small banks last month to try and boost the level of lending in the economy, especially to business and not to the property sector.
Specifically the Chinese government and central bank are very worried about the looming spectre of deflation.
“In recent months the scale of consumer price increases has come down and the scale of producer price falls has widened and this has had the effect of pushing up the level of real interest rates,” the People’s Bank of China said in its statement at the weekend.
“Deflationary risk and the property market slowdown are two main reasons for the rate cut this time,” said a central bank official in an interview late Saturday quoted on Marketwatch.com. China is dangerously close to “slipping into deflation," a newspaper owned by the central bank, Financial News, warned last week.
Rising deflation risk in China
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The rate cut was made ahead of the release yesterday of figures showing another weak month for Chinese manufacturing in the official survey of the sector, but stronger growth in the country’s growing services sector.
Many Chinese analysts and policy makers have been calling for further monetary easing as growth continues to slide and deflation looms.
The next inflation report is around 10 days away, but the January update showed disinflation crushing consumer prices lower (to an annual rate of just 0.8%), while the producer prices have been falling for the past three years, the longest period on record and deflation is now running at an annual rate of 4%.
Given that background, and weak data on the health of the country’s manufacturing sector, it should have been no surprise that China’s central bank cut benchmark interest rates on Saturday for the second time in three months amid growing concerns about slowing growth and the threat of deflation.
The first cut last November was the first for two years, so for a second cut in just three months gives some idea of the heightened level of official concern about the strength of the Chinese domestic economy, the level of demand and the growing threat from deflation.
The rate cut follows a weak reading in the ‘flash’ report on Chinese manufacturing from HSBC/Markit last month (which will be updated later today) and yesterday’s weak reading from the official survey of manufacturing.
The official Purchasing Managers’ Index (PMI) inched up to 49.9 in February from January’s 49.8, just under the 50-point level that separates growth from contraction on a monthly basis.But a separate official services PMI, also released on Sunday, showed growth in the sector accelerated to 53.9, up from 53.7 in January
Driving much of the price falls is a combination of weak demand (triggered by the slide in property), lower oil prices and big falls in the prices of commodities such as copper, iron ore, grains and oil seeds.
Housing prices are still falling, investment in land and new buildings is tumbling, demand for whitegoods and other manufactured goods is weak and prices are falling as a result for steel, copper based goods and a raft of other products.
