China Rate Cut

By John Richardson

CHINA surprised economists and markets with a 25 basis point cut in benchmark lending rates on Thursday. This was the first rate cut since the economic crisis of 2008.

The cut was seen as indicating that the economy is slowing down faster than had been previously thought.

Industrial production for May, due to be released on Saturday, is now expected to show a faster deceleration than had been forecast.

Interestingly, economist Donna Kwok, in this article from CNBC, says that there is a lot more to the rate cut than meets the eye.

The discount that banks will be allowed to offer on lending rates, relative to the benchmark, has been more than doubled, she said. China strictly controls the interest rate at which banks can lend money and pay depositors.

“The discount that banks were previously allowed to offer on lending rates relative to the benchmark rate has been doubled, from 10 percent to 20 percent, which means that the lowest official lending rate has effectively been cut by 63 basis points, not just 25 basis points,” she added.

A 63 basis point cut suggests the government has become very, very worried about the slowdown in global growth.

Questions the chemicals industry needs to ask about the rate cut include:

*Will it be enough to restore the confidence of chemicals and polymer buyers, who have become reluctant to borrow money, regardless, seemingly, of the cost and availability of finance?

*What more can China’s senior leadership do before the end of the year to boost growth, given that the make-up of the Politburo is about to change?

*Could a panic stimulus package do more long-term harm than good?

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