Experts: China’s Surprise Rate Cut May Signal Deeper Woes

Friday, 06 Jul 2012 10:32 AM

By Nancy Stanley

China’s interest rate cut on Thursday appears to signal that the world’s second-largest economy is in worse shape than believed and that the government is possibly beleaguered about its growth prospects, economists tell CNBC.

“The timing is earlier than expected, even if we already penciled-in one more cut in the third quarter,” HSBC economists Qu Hongbin and Sun Junwei wrote in a report cited by CNBC. “This may foreshadow worse-than-expected growth numbers that are due to release next week.”

The key economic data being released next week include inflation and trade figures for June and second-quarter gross domestic product (GDP) data.

“The indication is that the data coming out next week will probably be on the weak side,” Zhiwei Zhang, chief China economist of global investment bank Nomura, tells CNBC. “This is a much stronger signal than a [reserve requirement ratio] cut, and this indicates urgency on the very senior level of the government certainly becoming stronger and that the government is becoming less tolerant of a growth slowdown.”

China has been taking steps to stimulate its economy since March, when growth slowed to 8.1 percent in the first quarter, according to The Associated Press. The interest rate cut in June was the first cut in four years.

According to a poll by Reuters that was conducted before the rate cut, economists expected GDP growth of 7.6 percent for the second quarter from a year earlier, making it the sixth quarter in a row a slowing growth and the weakest performance since the 2008-09 financial crisis, CNBC reported.

Zhang notes that there will be further stimulus measures if the GDP number shows continued weakness for the second quarter, which would indicate that China could miss its official growth target. He expects the People’s Bank of China to cut the reserve requirement ratio by 50 basis points at least once more in July.

Charles Dallara, managing director of the Institute of International Finance, tells CNBC that lifting domestic lending might not be enough to help the sluggish growth in China, as foreign demand for Chinese goods continues to be “weak.”

“If you step back and think about it, just a little over two years ago, in 2009, it was not surprising at all to see Chinese exports growing at a 30-plus percent clip,” Dallara says. “Now you see the value of their exports averaging, in the first part of the year so far, below 10 percent. Clearly, the global environment is weakening and I am afraid we are getting negative synergies among the major economic zones of the world right now."

The government on Thursday also called on banks to control mortgage lending, the AP reports, suggesting that the government is worried about resurgence in real estate speculation.