Another Loosening of Chinese Monetary Policy

August 25, 2015

Officials at the People‚Äôs Bank of China cut the one-year lending and deposit rates by 25 basis points to 4.85% and 1.75%, respectively, and the targeted reserve requirement to 18.0% from 18.5% today.  The announcement was made after Chinese equities fell another 7.6% today to their lowest level since December and just two weeks following a small devaluation of the yuan.  Interest rates had been reduced earlier in June and July of 2012, November of 2014, and February, June and July of this year.  The new lending and deposit rate levels now sink even further below the 5.31% and 2.25% Great Recession levels maintained in 2009 and most of 2010.

In In explaining today’s actions in a question & answer statement, officials did not mention the sharp decline of share prices this year but dwelled instead on broad economic policy objectives and trends in growth and inflation.  In the year to July, consumer prices and producer prices respectively rose 1.6% and fell 5.4%.  Industrial production rose 6.0%, down from 7.9% last December.  Retail sales went up 10.5%, down from 11.9% last December, and on-year growth in fixed asset investment of 11.2% in January-July was down from 15.7% in 2014.  Real GDP between 1H14 and 1H15 of 7.0% was 4.8 percentage points less than seen between the first quarter of 2009 and 1Q10.

Policymakers want to promote a structural shift in the composition of Chinese growth as well as financial stability, 7% growth and higher inflation.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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