Checking Up on China

Concerns about potentially slowing Chinese economic growth have been widespread for several quarters now. And indeed, China’s Q1 growth was 8.1% y/y—a slowdown from Q4 and below its recent average. However, as we’vewrittenbefore, Chinese officials are incentivized—especially during this leadership transition year—to take measures to boost growth.

Most recently, the People’s Bank of China (PBC) announced it would cut interest rates by 0.25%. Their one-year lending and deposit rates now stand at 6.31% and 3.25%, respectively. Additionally, they liberalized banking regulations—increasing the bandwidth on lending rates. Whereas before banks could offer loans for up to 90% of the benchmark rate, they may now offer them for 80%—potentially making loans cheaper and increasing competitiveness between banks. What’s more, the PBC provided some incentive for Chinese savers to boost deposits by setting a bandwidth on deposit rates at 110% of the benchmark rate.

This was yet another recent sign China is increasing pressure on its growth throttles. In just the past few weeks, we’ve seen the following:

• Official statements from the Premier and State Council to focus on growth and stability.
• Chinese iron ore shipments from the world’s biggest commodity export harbor hit a record last month.
• Official statements planning to fast-track infrastructure projects.
• Reports of banks being told by the government to increase lending—with a subsequent report new loans will come in at 800 billion yuan, easily beating expectations.
• Basel III capital requirements being delayed until 2013 and risk weightings for small business loans decreased.
• Reports of housing restrictions being relaxed by local governments.
• Change of land-use regulations for property developers—use it now or lose it—which incentivizes them to use it.
• New consumption subsidies (cash for clunkers and energy saving appliances.)
• Plans for tax changes to stimulate spending.
• Plans to double approvals of corporate bond sales y/y for 2012.
• Allowing small and medium businesses to issue bonds for the first time.
• Pledging to reduce red tape for firms to enter the Financials and Energy sectors.

All of these actions seem consistent with a goal of boosting growth in the near future. Whether they’re successful or not, it’s key to remember China is now the world’s second largest economy. Whether economic growth moves at 8% or 9% or 10%, that still adds a hefty chunk to global output.