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China’s Interest Rate Cuts Could Trigger Inflation, Say Experts

By Liang Xin
Sound of Hope Radio Network
Created: July 9, 2012 Last Updated: July 9, 2012
Related articles: China » Business & Economy
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The entrance of the headquarters of the People's Bank of China, in Beijing. (Liu Jin/AFP/Getty Images)

The entrance of the headquarters of the People's Bank of China, in Beijing. (Liu Jin/AFP/Getty Images)

China’s central bank announced further cuts to benchmark deposit and lending rates on July 6, the second time it has done so in about a month. It is widely believed that the cuts were made in response to China’s slowing GDP growth. However, some economists do not believe that it will boost China’s economy as hoped, but instead trigger a new wave of inflation.

The People’s Bank of China had previously lowered benchmark lending and deposit rates by 25 basis points to 6.31 percent and 3.25 percent respectively, on June 8.

As of July 6, the rates have been further lowered by 31 and 25 basis points, to 6 percent and 3 percent respectively. The central bank has also allowed lending rates to be set as low as 70 percent of the benchmark rate, down from a previous 80 percent.

Some analysts believe that this will make borrowing more attractive as loans become more affordable.

Frank Xie, a professor at the University of South Carolina Aiken, believes that China’s economy has slowed to a stall, and is now in a worse crisis than authorities have anticipated. “That is why interest rates were cut twice in a month, because they desperately tried to stimulate economic growth,” Xie told the Sound of Hope (SOH) radio network.

He also noted the obvious asymmetry in the cuts this time, with the reduction in deposit rates smaller than that of lending rates. This could be due to authorities fearing a bank run will be triggered, he said.

U.S.-based China expert and former aide to ex-premier Zhao Ziyang, Cheng Xiaonong, told SOH that the latest move is a clear signal of China’s current economic recession, and proves that China’s economy is now far worse than what authorities claimed. “The authorities have therefore started taking a variety of measures to combat the recession,” he said.

This could also mean that China’s claims of having an 8 percent GDP growth were false. “If China’s GDP growth was indeed 8 percent, the authorities should have raised the interest rate instead of lowering it,” said Cheng.

However, the central bank said that the floating range of home loan lending rates would not change, and that “financial institutions should continue to strictly abide by the differentiated home loan policy, and curb speculative real estate investments.”

China’ property market nine-month-long downtrend has ended, with the market warming slightly from March through June, according to a recent report by state media.

This indicates that local governments have already begun pushing up real estate prices, said Cheng. “Evidently, the central government has turned a blind eye to this and has not taken any action to curb real estate prices.”

Cheng commented that China has a badly distorted economic structure, and that interest rate cuts would not stimulate the continuously deteriorating economy.

“For instance, five percent of the Chinese population controls China’s wealth, whereas the other 95 percent has no real purchasing power. Once exports are obstructed, returns on investments in basic infrastructure will be zero, and loans cannot be repaid. Consequently, China won’t be able to maintain its economic growth.”

J.P. Morgan said it believed the direct trigger for the interest-rate cut was a “significant easing in inflation pressure,” to less than 3 percent, the Wall Street Journal reported.

However, Cheng said that the drop in inflation could only be a temporary phenomenon. “Chinese authorities have begun to implement the same monetary policy they used four years ago, which resulted in inflation. They have injected a large amount of money into circulation. Therefore, we may see rising inflation again in another four months time.”

Xie also said that the Chinese authorities may continue to print more money in the near future, in effect implementing a loose monetary policy. “The Chinese regime will let inflation eat away its citizens’ wealth in order to maintain its fake economic numbers.”

“In fact, there is no solution to China’s economic problems at all,” Xie concluded.

Read the original Chinese article.

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