China move shows global reliance on low rates to lift growth

AP News
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Posted: Oct 23, 2015 2:16 PM

BEIJING (AP) — China's sixth interest-rate cut in a year shows how hard it is to keep the world's second-biggest economy growing vigorously while attempting one of history's most audacious economic transformations.

The country's central bank on Friday announced cuts in benchmark interest rates on loans and deposits.

The moves by the People's Bank of China are the latest sign that the world's major central banks remain committed to unusually low rates to try to spur economic growth. This week, the head of the European Central Bank made clear that the ECB is weighing further steps to ease borrowing rates.

And next week, the Federal Reserve is widely expected to hold its key rate near zero, where it's remained for seven years.

China's latest rate cut came four days after the government reported that growth had slowed to a six-year low of 6.9 percent from July through September. The Chinese economic slowdown has unnerved investors around the world, hurt countries that had prospered by supplying China with raw materials and weighed on global growth.

China's deceleration is partly deliberate. Beijing wants to move the country away from an overreliance on exports and often-wasteful investment in housing, factories and infrastructure projects such as roads and high-speed trains. Instead, China is seeking slower but more sustainable growth driven by consumer spending.

Recent economic figures reflect the transition. In September, growth in factory output slowed to 5.7 percent from August's 6.1 percent. At the same time, retail sales growth rose to 10.9 percent from July's 10.5 percent. E-commerce spending surged 36 percent in the third quarter over a year earlier.

But the growth in consumer spending and services isn't entirely offsetting the decline in older industries. As a result, overall growth is slowing, raising fears of job losses and unrest.

The government is stepping in to try to keep official measures of growth close to 7 percent. The Chinese central bank said it will reduce the benchmark rate on a one-year loan by 0.25 percentage point to 4.35 percent, effective Saturday, and cut one-year deposit rates by the same margin to 1.5 percent.

The bank also freed up more money for lending by reducing the level of reserves Chinese banks are required to hold.

"There still exists some downward pressure on China's economic growth," the People's Bank of China said in a statement. "We need to continue to use monetary policy tools to strengthen economic structural adjustment and create a good monetary and financial environment."

The rate cut "is not a cure for all their ills," says Ajay Rajadhyaksha, head of macro research.

Chinese consumers save too much and spend too little, Rajadhyaksha says, so the country needs "consumers to start spending more, a lot more, and quickly."

Beijing has also started a mini-stimulus program to boost the economy through public works projects.

David Dollar, senior fellow at the Brookings Institution, says that given the difficulty of managing an ambitious transition, Beijing might want to give itself more leeway — broadening its target for annual economic growth to 6 percent to 7 percent instead of shooting for 7 percent.

"It's easier to rebalance at 6 than at 7," he says.

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Wiseman contributed from Washington.