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It's China to the rescue. Will Beijing be able to stabilize the financial markets when the Federal Reserve and the U.S. Treasury can't?
I'd rate the chances that the Chinese moves will succeed at a very definite "maybe." But that bit of very qualified optimism is the most hopeful I've been in a week.
Here's what China has done and why I think Beijing's medicine might work even when the Fed's hasn't.
Beijing took two big moves last week.
- On the nation's Sept. 15 market holiday, the People's Bank of China, the country's central bank, cut interest rates. The one-year lending rate, China's benchmark interest rate, will fall to 7.20% from 7.47%, equivalent to one of those 0.25-percentage-point cuts that the U.S. Federal Reserve makes.
- Just as significantly, the central bank lowered the reserve ratio for the country's smaller banks by a full percentage point. Those banks will have to keep fewer reserves on deposit with the People's Bank, and that will free up more money for them to lend.
The September interest-rate cut was the first in six years and marks an end to a tightening cycle that had pushed reserve requirements to a record 17.5% in June.
You don't have to look far to find the reasons for the rate reduction. Growth in the Chinese economy had slowed to a 10.1% annual rate in the three months that ended in June. That was down from 10.6% in the first quarter of 2008 and from 11.9% for 2007 as a whole.
Economists had started to predict that growth would drop below 9% in the second half of 2008 and to just above 8% for 2009. That was too slow for China's leaders, who need growth of 7% or so just to stay even with the demand for jobs created by a growing population and continued migration from the countryside to cities.
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Back on the accelerator
China had slowed its growth rate in an effort to get inflation under control. Consumer inflation in June fell to a 14-month low of 4.7%, but inflation at the factory gate -- what the United States calls producer price inflation -- was still running at more than 10%. Thus Beijing's pro-growth faction had to override objections from fiscal conservatives.According to the Standard Chartered Bank, the People's Bank is now likely to cut interest rates again in the fourth quarter by another 0.27 percentage points and then twice more in each of the first and second quarters of 2009. The total reduction would amount to just a little less than 2 percentage points and would bring the benchmark interest rate down to 5.85%, the bank projects.
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In my Aug. 19 column, "The key to our wild market: Asia," I signaled my belief that the Chinese would stop trying to slow growth in their economy in order to fight inflation. But, quite frankly, I expected that the first steps would be tentative ones, like relaxing quotas on bank loans and similar regulatory tweaking. I thought any big moves were months away. So while I'm not surprised at what the People's Bank did, I am surprised at how quickly and aggressively Beijing has moved. It's likely that the continued plunge in China's stock market put the move on the fast track.
The benchmark Shanghai stock market was down 64% for 2008 as of Sept. 18.
Why do I believe the stock market goaded Beijing into early action? Because on Sept. 18, the government moved to intervene directly in the Shanghai market.
That day, the government announced that Central Huijin Investment, a unit of China's $200 billion sovereign investment fund China Investment Corp., would buy shares of three of the country's largest banks: Industrial & Commercial Bank of China, China Construction Bank and Bank of China. In addition, China's state-owned companies would be encouraged to buy back their own shares.
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That "encouragement" began the same day when the state-owned Assets Supervision and Administration Commission, a government entity that controls a large number of state-owned companies, announced that it had begun buying shares. And finally, the government also canceled the 0.3% tax on stock purchases it had slapped on in happier days to slow the market's climb. The first part of the tax was canceled in April, dropping it to 0.1%, and the September move eliminates it entirely. Just so no one can doubt that this measure is intended to push up stock prices, the tax was eliminated only for stock purchases. The tax on stock sales remains just where it was in April, at 0.1%.
Continued: Why China is up to the task
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