The People’s Bank of China is getting pretty good at springing surprises on the market. Yesterday it cut interest rates again. The central bank cut the lending rate by 31bp to 6%. This was the second cut it had made to the benchmark interest rate in the space of a month.
If traders were taken aback by the rapidity of the moves – prior to this the last time rates had been cut was 2008 – it seems clear that Beijing policymakers see the loosening measures as necessary after an escalation of bad news about the economy.
A particularly worrying indicator is HSBC’s purchasing managers’ index, or PMI. Economists were dismayed to see it had fallen to 48.2 in June, compared to 48.4 in May. Worse, that was the eighth consecutive month of scores below 50 – suggesting China’s manufacturing sector has been contracting for the entire period.
HSBC’s data definitely paints a bleak picture.
The fall in export orders was particularly severe as a subcomponent of the HSBC reading, with the relevant sub-index down to 45.7, its lowest level since March 2009.
The employment sub-index, which also contributes to the overall reading, contracted for the fourth consecutive month, and although it was slightly higher than in May, at 48.4, it is reminiscent of the pattern last seen during the 2008 financial crisis.
When it released the data HSBC predicted more rate cuts were likely. “As the slowdown in economic activity starts to weigh on employment, Beijing should step up easing efforts to stimulate domestic demand and sustain job creation,” said the bank.
HSBC is still in the more bullish camp that expects growth to rebound in the second half, as government stimulus and rate cuts start to take effect.
It estimates GDP will grow by 7.8% in the second quarter, compared to 8.1% in the first, “which is likely to mark the cyclical trough in the current cycle”.
But not everyone believes that China has bottomed out just yet. A more bearish voice is Chen Dongqi, vice director of the academy of macroeconomic research under the National Development and Reform Commission, the nation’s top economic planner.
He said recently that China needed more “active government policies,” reports MarketWatch. Chen thinks GDP growth slouched to 7.5% in the first half.
Speaking at an economic forum at Tsinghua University, Chen recommended that the government implement further tax cuts to help exports and support economic growth.
He also pushed for more investment in infrastructure projects, although not on the same scale as during the global financial crisis.
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