China open to more interest rate cuts

China open to further interest rate cuts

China’s leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making.

Friday’s surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank, which had persisted with modest stimulus measures before deciding, last week, that a bold monetary policy step was required to stabilise the world’s second-largest economy.

China’s economic growth slowed to 7.3% in the third quarter and policymakers feared it was on the verge of dipping below 7% — a rate not seen since the global financial crisis. Producer prices charged at the factory gate, have been falling for about three years, piling pressure on manufacturers, and consumer inflation is also weak.

“Top leaders have changed their views”, said a senior economist at a government think-tank involved in internal policy discussions.

The economist, who declined to be named, said the People’s Bank of China had shifted its focus towards broad-based stimulus and was open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio, which effectively restricts the amount of capital available to fund loans.

“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and reserve requirement ratio cuts are also likely,” the think-tank’s economist said.

Friday’s move, which cut one-year benchmark lending rates by 40 basis points to 5.6%, also arose from concerns that local governments are struggling to manage high debt burdens amid reforms to funding arrangements.

Reuters