Action to stabilize economy

The central bank of China suddenly declared on the evening of June 7 that it was reducing the yuan's deposit and loan interest rate by 0.25 percentage points from June 8. It also adjusted the upper and lower limits of loan and deposit interest rates to 1.1 and 0.8 times the benchmark rate respectively. More effective monetary, fiscal and financial policies will be made to cushion the decline of the economy, says an article in the 21st Century Business Herald. Excerpts:

This interest rate cut indicates two points at least. Chinese economic growth is slowing down very fast and the demand for loans is weak. The central bank failed to boost loans by reducing the required reserve ratio so it can only resort to cutting interest rates in a bid to stimulate loans and prevent the Chinese economy from declining.

The consumer price index for May will be lower than 3.25 percent because the central bank has hinted it will restore and maintain positive interest rates. The deposit interest rate will be 3.25 percent after the cut.

The interest rate cuts do not mean that China may resume its stimulus economic policies like before. Reducing interest rates is a much stronger signal than reducing the reserve rate ratio, which almost means the central bank will carry out some loose monetary policies.

Correspondingly, the central authority will have enough reasons to cut tax. Foreign exchange policies should also be adjusted. China's foreign exchange growth has slowed down since the forth quarter last year at an unprecedented speed. It is caused by the declining trade surplus as China's main trade partners go through difficult times.

It is believed the yuan will depreciate to some extent in the near future to stimulate China's exports. Making exports stable is as important as maintaining stable monetary policies and a healthy job market.

The cut in interest rates on June 8 suggests that the condition of the economy is worse than expected. That the CPI will drop lower than 3.25 percent does not mean it will remain that low.

More effective monetary, fiscal and financial policies will be made to cushion the decline of the economy. Any subsequent loosening of China's monetary policies will depend on the effects of these policies.