IF GROWTH is so strong, why did the Chinese central bank feel the need to cut interest rates again? It is only reasonable to ask this after the People's Bank of China cut rates on October 23rd, the sixth time in a year, in the same week that the government said the economy grew 6.9% year-on-year in the third quarter, ahead of market expectations. The answer lies in the question: growth is not as strong as official data suggest, and the government knows that.
Nominal growth has slowed to 6.2%, the weakest since 1999, translating directly into weak cash flow for companies that already face heavy debt burdens. The industrial sector has been especially hard hit, with the country's northern rustbelt on the brink of a recession. And more than a percentage point of overall growth this year has stemmed from activity in the financial sector, a contribution that will fall away quickly in the wake of this summer's stockmarket collapse. Many analysts reckon real growth is closer to 5-6%, well shy of the government's 7% target. More than three years' worth of producer price deflation tilt risks to the downside.
If that all seems bleak, it is important to put the rate cut in the proper context. Paired with a reduction of bank's reserve requirements, and coming unscheduled on the evening of October 23rd, it might have appeared to be a surprise move. But all Chinese monetary...Continue reading
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