| BEIJING, June 8
BEIJING, June 8 Global cheers over China's
decision to cut interest rates could fade to stony silence if,
as some economists fear, the move signals that some grim
economic data are about to be released.
China's surprise rate cut unveiled on Thursday has boosted
hopes that cheaper credit will help combat its faltering
economic growth and has encouraged global share markets in their
belief that the major economies are stepping up stimulus.
But the central bank's cut, the first since the global
financial crisis in late 2008, has also raised concerns about a
deluge of May Chinese data due this weekend.
Reuters polls published earlier in the week suggested the
world's second-largest economy probably showed signs of
stabilising last month from a surprisingly weak April. Now, some
economists worry that those expectations may be misplaced.
"The concern is that with industrial production and CPI data
coming out of China at the weekend that it's indicative of them
knowing something about weak data going forward," said Adrian
Schmidt, currency strategist at Lloyds Bank in London.
The outlook was already looking grim by Chinese standards.
Analysts forecast in a Reuters benchmark poll in May that
China would deliver its weakest quarter of growth in three years
in the second quarter at 7.9 percent. It would also mark the
sixth straight quarter of slowing growth.
They expected 2012 full-year expansion of 8.2 percent, a
pace that industrial nations would envy but would be the weakest
outcome for China since 1999.
The People's Bank of China (PBOC) cut the official one-year
borrowing rate by 25 basis points to 6.31 percent and the
one-year deposit rate by a similar amount to 3.25 percent in an
announcement after Asian markets closed on Thursday.
While the cut to borrowing costs should help in the near
term to shore up the economy, the central bank also gave banks
additional flexibility to set competitive lending and deposit
rates in a step along the path of financial liberalisation.
The PBOC said it was giving banks the freedom from June 8 to
set deposit rates as high as 110 percent of the benchmark rate
and offer rates on new loans for as little as 80 percent of
official policy rates, an additional 10 percentage points of
leeway from the current 90 percent limit.
Commercial banks until now have been barred from charging
rates on deposits higher than the benchmark set by the central
Based on Reuters polls earlier this week, fixed asset
investment and industrial production numbers for May - two of
China's most crucial indicators of activity and job creation -
are forecast to show signs of stabilising.
"Flat is not the most desirable," Ren Xianfang, senior China
analyst at consultancy firm IHS Global Insight, said before the
rate cut was announced. "But it is better than getting worse."
Industrial production probably rose in May by 9.9 percent
from a year earlier, picking up from a 34-month low in April of
9.3 percent, the Reuters polls show.
Fixed-asset investment growth in the first five months of
the year compared with the same period last year is expected to
stay at a decade-low pace of 20.0 percent, little changed from
20.2 percent in April's data covering the first four months of
KEY YEAR FOR LEADERSHIP
The rate cut follows a decision to accelerate key investment
projects, announced by Premier Wen Jiabao at a regular cabinet
meeting on May 23.
Until Thursday, Chinese policymakers had been wary of
loosening policy too far and had referred to "fine tuning"
policy to support growth.
Beijing is still tackling the after-effects of the 4
trillion yuan ($635 billion) stimulus programme unveiled in late
2008 during the global financial crisis.
The programme triggered a frenzy of real estate speculation,
saw local governments amass 10.7 trillion yuan of debt and drove
inflation to a three-year peak by July 2011.
"China is recognising that they have to keep their economy
stimulated and growing," said Gordon Charlop, a managing
director at Rosenblatt Securities in New York.
"They will be proactive to make sure they don't run into any
of the problems we've faced and are facing and Europe is
Beijing wants to see growth solidly underpinned before a
once-a-decade leadership change at the top of the ruling
Communist Party, due towards the end of this year.
But it is likely to be wary of setting off a fresh round of
price hikes that could put social stability at risk.
High inflation has preceded political tension in China in
the past - something the government is desperate to avoid as the
leadership change has already been complicated by the purge of
populist politician Bo Xilai and the murder scandal surrounding
Michael Derks, chief strategist at FXPro in London, said the
rate cut "reflects Beijing's increased confidence that
inflationary pressures are easing".
The consumer price index is expected to have risen 3.2
percent in May from a year earlier, down from April's 3.4
percent and safely below the official 4 percent target for 2012.
A slight pick-up in export growth is also forecast for May.
The consensus call of 6.8 percent would be comfortably ahead of
April's 4.9 percent, but still well below the official 10
percent expansion targeted for the full year.
Import growth, forecast by analysts at 5 percent
year-on-year in May, would be an improvement on April's 0.3
percent rise, but again well below the 10 percent target and an
indication of still fragile demand at home and abroad.