PBOC Cuts Interest Rates as Economy Continues Slide

China’s central bank announced a 25 basis point cut to borrowing and lending rates on Thursday, the latest measure taken to stave off a hard landing for the economy. From The New York Times:

The interest rate cut was the first by the central bank since December 2008, the last time policy makers in China were deeply worried that they might be behind in responding to an economy slipping downhill faster than they expected. Many economists believe that China’s leaders were behind the curve again this year, after two months of near-paralysis on economic policy this spring as the Communist Party wrangled over the fate of one of its own, Bo Xilai.

China’s National Bureau of Statistics is scheduled to release a long list of economic indicators for May on Saturday in Beijing, including industrial production and the consumer price index. Yu Song, an economist in the Beijing office of Goldman Sachs, said that government policy makers are certain to have those figures already.

The decision to cut interest rates suggests that the Chinese economy performed poorly last month, he wrote in a research note, and that Prime Minister Wen Jiabao personally ordered policy makers to take action.

The interest rate cut comes amid talk of a fiscal stimulus package meant to boost investment and promote domestic consumption. From Beijing, however, The Washington Post’s Keith B. Richburg writes that Chinese officials are wavering over how to respond to the slowdown in economic growth:

The government has taken a few steps to try to coax consumers to spend more. On June 1, the government introduced subsidies of up to $62 to help push consumer sales of energy-efficient air conditioners, flat-panel televisions and other appliances. Separately, the government revived a “cash for clunkers” program, first used during the 2009 stimulus, to help people in rural areas turn in their old cars for newer models.

But economists said those half-steps only delay the more fundamental reforms that are needed. For example, allowing interest rates to float according to the market would give consumers more incentive to invest their money in banks, giving those institutions more capital to lend. Also, the government could make consumer credit easier. And freeing capital controls, including letting foreign firms list on China’s stock market, would allow more international investment to flow in.

Such steps would require the Communist Party to do something it has rarely done: give up a modicum of control. But many see the slowdown and the leadership transition as China’s best chance to reform and modernize its economy.

“It’s one thing for Hu Jintao and Wen Jiabao to go out on a weak note,” Lardy said. “The new guys are assessing the risk of a really serious slowdown, not lasting a few months but a few years. I’m hoping that’s going to focus a few minds.”