The People’s Bank of China on June 7 lowered banks’ one-year lending rate by a quarter percentage point to 6.31 percent and one-year deposit rate by the same margin to 3.25 percent — the first full-scale monetary easing by China since a similar move in December 2008 in the wake of the Lehman Brothers shock.
Clearly Beijing feels a sense of crisis about China’s economic slowdown in the midst of the Greek and Spanish sovereign debt crises. Given China’s critical role as an engine of world economic growth, it is hoped that Beijing will take necessary measures to stabilize its economy.
The crisis in Europe — China’s most important market — is taking a toll on the Chinese economy. Growth of China’s gross domestic product has slowed for five consecutive quarters. The January-March period of 2012 saw the annual rate of GDP growth fall to 8.1 percent from 8.9 percent in the previous quarter.
China’s industrial production in April weakened to 9.3 percent, the lowest level since May 2009. The business sentiment index for May fell for the first time in six months.
The Chinese economy is slowing down faster than expected. On June 8, the International Monetary Fund’s Deputy Managing Director David Lipton said that China’s economic growth in 2012 is expected to slow to around 8 percent.
There has emerged a possibility that the annual rate of GDP growth in the April-June period will be less than the government target of 7.5 percent. This apparently forced the Chinese leadership to adopt a monetary easing measure.
With a new generation of leaders set to take power in China this autumn, Beijing is placing priority on avoiding economic and social confusion. The 4 trillion yuan (about ¥50 trillion) fiscal stimulus China adopted following the Lehman Brothers shock caused a real estate bubble, so China is understandably reluctant to adopt another large-scale stimulus package. But it should not eliminate any options at this point.
There is the opinion that the European sovereign debt crises will cause a global economic meltdown. The central banks of major economies, including the United States, are poised to take further monetary-easing measures.
The Bank of Japan should seriously consider such measures as well. The Noda administration is currently preoccupied with raising the consumption tax. One wonders whether the government is giving serious thought to the consequences of another world economic crisis.