On June 7 China cut its interest rate by 25 basis points for the first time since December 2008 - an unexpected decision, which caused markets to rally.
On June 7 China cut its interest rate by 25 basis points for the first time since December 2008 – an unexpected decision, which caused markets to rally.
Notably, China allowed a 10% deviation on the deposit rate and a 20% deviation on the lending rate versus the official benchmark rate.
Chong How Ong, portfolio manager of the Reech White Tiger Asia fund at international management group Reech AiM Group, comments on the outlook for China following these recent events.
He said: “This is a watershed development as it signals China is moving towards a flexible interest rate regime. This is also likely to be a precursor to the renminbi (RMB) internationalisation, which we think is likely to happen in the next 24 months, especially if RMB appreciation pressure is no longer prevalent.
“We have always maintained that China will not be cutting rates until inflation stays below 3% for a period of time, but the fact that they have run ahead of the curve shows that they are concerned about deflationary pressures from global turmoil and impact from controls on the local property markets. China June CPI came in weaker than expected at 2.2%, the lowest in 29 months. 2Q12 GDP grew by 7.6%, the lowest rate since 1Q09.”
How Ong thinks the next big question is whether China is going into a hard landing or a soft landing. “Investors frequently forget that China is still a communist country: their primary focus is on providing to the people, GDP growth is a consequence of that focus.
“A long term targeted growth rate of 8% is not arbitrary, it is the standing target of the Chinese government for the past 30 years since the late leader Deng Xiao Ping. It is the rate by which the Chinese economy can double in 10 years, which is incidentally also the Chinese policy period of double the five years’ plan and the normal office term of a Chinese leader.
“Under the current and soon to be retired leadership of Hu Jin Tao and Wen Jia Bao, the Chinese economy rose more than fivefold to more than $7trn, helped by the 24% RMB appreciation over that period. In fact, they are more concerned about the GDP per capita, as it serves as a proxy to the wealth of the people.