China’s Central Bank Signals Concern About Sagging Asset Values

The International Herald Tribune’s Karen Yeung and Samuel Shen report that some traders did not anticipate China’s Central Bank rate cut of .27% until later in 2008. The early cut may reflect a need to support Chinese asset prices as oppose to stimulate its slowing economy.

The surprise decision to ease China’s monetary policy may be to help support China’s real estate sector and slowing stock markets rather than to boost the economy.

“This is mainly a signal for the stock market,” said Shi Lei, an analyst at Bank of China in Beijing. “The index is near 2,000 points, and that’s a key level where authorities feel they need to come in and help the market.”

Although China’s economy is slowing, it is still growing at a rate of 10.4%, and most Economists expect its GDP to continue to grow above 8% for the remainder of 2008; however, analysts speculate that if China were anxious to encourage solely economic growth, they would have also cut the bank deposit rates, not just the lending rates. This would encourage customers to shift investments from savings into stocks. By lowering only the lending rate, the Bank of China is trying to avert a further decline in asset markets. Many emerging markets have experienced a decline in their asset markets, such as real estate, and analysts believe China is trying to avoid this.

Also related: From Bloomberg, Li Yanping and Kevin Hamlin “China’s Central Bank May Cut Rates Again

In the coming months, China’s policy makers may consider further interest rate cuts to allow banks a better ease of lending, to help spur economic growth, and to boost spending.

China’s Central Bank cut rates from 7.47% to 7.0% earlier this week to, “help solve important problems in our economy for its continued stable and fast development,” the central bank reported.

China is experience its slowest inflation rate in 14 months, and an additional cut may assist in continual growth and job protection for China’s economy while the credit crisis deepens around the world.


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