A surprise cut in the one-year lending rate by the People’s Bank of China – by 27 basis points and the first in six years – came after weeks of glum economic news. The announcement, accompanied by a 100-basis-point cut in the reserve requirement ratio for smaller banks, was a sign of Beijing’s readiness to cut into bank profits to stimulate growth.
Spurred on by the financial meltdown on Wall Street, the government was also emboldened by moderating inflation at home, which gave it more room to implement growth-centered policies. China’s consumer price index (CPI) growth had moderated to a lower-than-expected 4.9% in August.
However, while CPI growth slowed slightly, producer prices continued to accelerate. Producer price index (PPI) growth rose to 10.1% in August, up from 10% in July. A silver lining could be that as international commodity prices soften, PPI growth may have peaked.
Other troubles were visible in the manufacturing sector, which contracted for the second month in a row. The China Federation of Logistics and Purchasing Managers’ Index – on which a figure of below 50 indicates contraction – was a seasonally adjusted to 48.4% in August, unchanged from July.
One set of numbers was more ambiguous. China’s trade surplus hit an all-time monthly high of US$28.7 billion in August due to lower imports. It is uncertain whether the reduction in import values indicates weaker domestic demand or simply reflects falling international prices of raw materials.
In addition to the lending-rate cut, Beijing is widely believed to be considering new ways to boost industries and encourage growth. One possibility is a reform of value-added tax payments, under which firms would be allowed to use fixed-asset investments to offset VAT payments owed to the government.
Another option, a US$54 billion stimulus package, would offer tax cuts and increase fiscal spending.
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