China's interest rate cut is no reason to panic
The number 8 has always been a lucky one in China. But for Westerners interested in the Chinese economy, it is a magic number too: 8 per cent is the alleged minimum growth rate the country needs to keep its fast-growing population working and happy. Anything slower than that, analysts say, and China faces the prospects of a 'hard landing' - a sudden halt to its decade-long economic boom.
So the People's Bank of China's decision to cut interest rates yesterday must have sparked quite a few concerns. The country's annual growth forecasts, at 8.2 per cent, were already down on last year's 9 per cent, and the weakest it has experienced since 1999. But the rate cut - by 25 basis points to 6.31 per cent - suggests things are not getting any better. Analysts now expect this week-end's economic data to produce some really bad news.
Should they be so worried? There are, of course, causes for concerns. Investors in China say most sectors are weakening. Local governments are indebted, real estate developpers are in trouble, commodity exporters say Chinese demand is ebbing. And the global outlook, with Europe in the doldrums, the US on a wobbly path, and the rest of the developed world slowing down, is not going to help much.
But the case for a 'hard landing' is exagerated. For one, China's reaction is, so far, a rather measured one - hinting that the government does not think the situation is that bad yet. Back in 2008, after the Lehman collapse, China encouraged its banks to go on a lending spree, and unveiled a massive stimulus program to tackle the consequences of the financial crisis. China has again started to consider stimulus measures - by accelerating key investment projects, cutting bank reserves requirements, and hinting at plans to speed up fiscal spending - since the beginning of the year. But this remain a piecemeal, prudent plan. It falls far short of the 4 trillion yuan ($635 billion) spending spree unleashed in 2008.
More importantly, China's current slowdown is in great part of its own making. The post-Lehman massive stimulus created a property bubble, exacerbated China's over reliance on infrastructure and exports, and fed in persistent inflation - a factor of ominous political tensions. The government has tightened monetary and fiscal policy since th to tackle these nasty side effects: today's rate cut comes after 6 consecutive rises last year, and several hike in banks' reserve requirement rates. This has ebbed GDP growth to its current level. And it should tell us that China still has plenty of room to do more should the situation really worsen.
Finally, it may be that China doesn't need to grow at 8 per cent anymore. As the FT's Lex suggests today, the country is not craving for jobs as much as it did before. Employment centres managed to fill only 70 per cent of vacancies in May, says the newpaper. And as the ratio between China's working population and the total falls, pressures to create as many new jobs will continue to ease. A measured slowdown might not be the harbinger for economic meltdown, political instability and social turmoil.
This doesn't remove the need for China to implement overdue structural reforms. It has to do more to rebalance its growth model towards domestic consumption, liberalise its financial system, and plant the seeds for private sector innovation, or face deep trouble in the medium term. But in the meantime, a hard landing is not likely: China still has a tight control on the economy, and plenty of cash in its coffers. What's more, it faces a once-a-decade leadership transition at the end of the year, and still has to deal with the aftershocks of a few embarrassing political scandals. Should the numbers really take a turn for the worse, expect China to deploy all its magic to save the economy.