China Cuts Key Interest Rates, Combats Fraud, Bad Loans and Manufacturing Slowdown

Econintersect: Both deposit rates and lending rates have been cut by 25 basis points by the PBoC (People’s Bank of China). The Chinese central bank moves are effective as of 8 June 2012. The new one-year lending rate is 6.31% and deposits will receive 3.25%, also for one-year commitment (like a U.S. CD).

The move to ease comes after five consecutive interest rate hikes as China attempted to deal with above target inflation and signs of speculation bubbles and malinvestment. An overbuilt real estate sector appeared to be finally slowing in the second half of 2011, inflation has come down below target in 2012 and GDP came in at a three-year low in the first quarter (8.1%). According to the Shanghai Daily, GDP key economic indicators continue to suggest downward risks for China GDP.

Another source, China Economic Review, reports that HSBC chief economist for China, Qu Hongbin, has raised his GDP estimate for the year to 8.6%. This is higher than the 8.2% consensus.

Crackdown on Fraud

At the same time China is taking action to loosen monetary policy to help support the economy, it is also dealing with increasing numbers of bad loans from the recent real estate boom and misadventures involving local government debts. Reuters reports on a new area that has been subject to fraud: steel trading. From Reuters:

Some steel traders, struggling to make ends meet due to anaemic demand and overcapacity, used loans meant for steel projects to speculate in property and stocks. That led the China Banking Regulatory Commission (CBRC) to issue a directive on April 26 ordering banks to curb lending, a CBRC official said.
“Many steel traders are highly-leveraged and misuse bank loans, making such lending highly risky,” a loan officer at the Bank of China in Shanghai told Reuters.

The problems of malinvestment and speculative excesses have been discussed by China expert Michael Pettis for the past two years. See a recent review by Pettis at Global Economic Intersection. Pettis has said that China is on an unsustainable path with growth rates above 3%, in sharp contrast with many projections for continued rapid growth.

Manufacturing Slowing

The two manufacturing PMI (Purchasing Manager Index) surveys for China have reported declining numbers in the most recent reports for May. The official PMI, which covers mainly large state-run firms, fell unexpectedly to 50.4 in May after reaching a 13-month high of 53.5 in April. The HSBC China Manufacturing Flash Purchasing Managers Index fell to 48.7% in May, a decrease from a final reading of 49.3% in April. The HSBC survey covers a broader range of Chinese manufacturing activity, including privately held companies and smaller businesses.

Numbers above 50 indicate expansion in China’s dominant manufacturing sector. The two PMI numbers have been telling diverging stories in 2012. The official number has now had six months in a row above 50. The HSBC number now has eight consecutive months below 50. If any significance can be put in one month, it appears the official number may be moving into conformance with the unofficial survey: 50.4 is just a smidge above the contraction demarcation.

The manufacturing numbers at the end of May prompted negative revisions in GDP estimates, as indicated in this excerpt from Reuters (via CNBC):

“Growth in Q2 is likely to slow, probably below 7.5 percent year-on-year. That puts the annual growth target at risk and the risks continue to increase because the external environment is weakening,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, told Reuters.
“The government will still try to get by with targeted, selective measures like the cash for clunkers programme, but we will get more monetary measures as well.”

Now that the first monetary measure has been announced those with more positive outlooks for China’s economy for the rest of 2012, like Qu Hongbin (earlier in this article), are giving projections contrary to those a week ago from Kowalczyk.

John Lounsbury

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