On Sunday, May 10, the People’s Bank of China (PBOC) announced that it will lower its one-year benchmark lending rate by 25 basis points to 5.1%. They also cut the one-year deposit rate by the same amount to 2.25%. This is the third interest rate cut by China’s central bank in six months.
Markets in Asia welcomed the expansionary monetary policy from the PBOC. In mainland China, the Shanghai Composite Index climbed 3.04% and closed at 4,333.58 points; Shenzhen Stock Exchange’s Component Index jumped 3.20% to 14,944.88 points. In Hong Kong, the Hang Seng Index increased by half a percent, and Japan’s Nikkei 225 was up by 1.25%.
China’s Economic Slowdown
Usually when central banks lower interest rates, they are trying to help the economy grow by making borrowing easier. Now having done that three times in half a year, the PBOC is actually announcing that economic growth is a lot worse than expected.
The interest rate cut announcement came just days after Thursday’s disappointing trade data for April. China’s exports were down 6.4% in April compared to last year. Imports turned out even worse: a massive 16.2% drop year-over-year. (Source: Bloomberg, May 8, 2015.)
The drop in exports and imports signals weak demand, on both the domestic and foreign sides. Weak demand has been slowing down growth in the Chinese economy. Case in point: in 2014, China’s economy grew 7.4%—its slowest pace in almost 25 years.
Meanwhile, bad debt is rising in China. Non-performing loans have jumped up by 140 billion yuan ($22.6 billion) to 982.5 billion yuan by March 31. This is the largest quarterly jump in more than a decade. (Source: Wall Street Journal, May 11, 2015.)
What Else Does China’s Economy Tell Us?
Known as the world’s manufacturer, China’s exports can be seen as an indicator of the global economy. When China’s exports are down, the implication is that the world economy is weak. And that, dear reader, is not good for anyone.
The lesson here is very simple: the Chinese economy is in trouble.
With that said, it shouldn’t be surprising to see this phenomenon sending waves of uncertainty throughout the global economy. Expect it to have a direct negative impact on the U.S. economy as well.