cutting its interest rate is all over the news today. The People's Bank of China, their version of the Federal Reserve, cut the bench mark interest rate and the deposit rate by 25 basis points today. Financial periodicals are all in a tizzy because its stimulative move by China to goose their flagging economy. What makes this a big deal is that this is the first interest rate cut China has done since 2008 during the height of the financial crisis. China is doing so to ease the flow of credit in hopes of stimulating growth. Export growth has fallen to 4.9% in May and fixed asset growth rates have fallen as well. On top of these figures is disappointing consumption, industrial output, and energy demand numbers, all of which have lowered. Viewing these figures as a whole indicates, that while China is growing, it faces the risk of recession. Now for those, like myself, who don't believe China's official growth numbers, this means that China is in a recession.
This is very bad news for the party leaders of China since they have staked their political legitimacy on continued economic growth. Despite the Wests perception of China as a nation that moves quickly and decisively China leadership is anything but. Loath to undertake new courses of action that could disrupt the standing order, China only acts decisively on matters that have been decided long ago. China was able to raise and build buildings, towns, and roads so fast because the party leaders had decided years ago to do so. China continues to invest in infrastructure and build buildings even though economic data has long shown that the nation has already past the point of any substantial incremental benefit. What people confuse as decisiveness is nothing more than a lumbering beast on autopilot.
China has been attempting to increase liquidity, without raising rates, for a while now. In 2011 they reduced the reserve requirement ratio 3 times, hoping that this would have a stimulative effect. And in may the central government tried to channel more credit and funds to small and medium sized enterprises (SMEs). It has also tried to increase domestic consumption. The fact that China is decreases the rates now shows that these policies have not been very successful. Part of the reason why China has cut interest rates is also to try and relieve their SMEs financial burdens.
The Chinese government has moved cautiously when trying to stimulate their economy. The leadership doesn't want to face the negative fallout of their stimulative policies, like they did after their 2008 stimulus. Part of the result of the 2008 stimulus was a dramatic increase in inflation, which caused increasing unrest in an already shaky nation. What this move shows is that China is increasingly running out of options when it comes to its current economic model. They cannot continue being the exporter of the world, and they cannot continue building bridges to no where.
The Chinese leadership knows this, but they also know that any drastic move away from these models could cause unrest that would oust them from power. Unfortunately for the Chinese leadership is that they may be facing that particular end game no matter what policy course they have chosen. The options for them to avoid this calamity has long since passed, they have passed the event Horizon in my opinion.