China rate cut raises fears of grim May economic data

Reuters: Global cheers over China’s decision to cut interest rates faded quickly on Friday as investors and economists worried that the move signalled the impending release of some grim economic data.

China’s surprise rate cut unveiled late on Thursday boosted hopes that cheaper credit would help combat its faltering economic growth and it encouraged global share markets in their belief that the major economies were 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, with Asian shares losing ground on Friday, bracing for ugly numbers.

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 per cent. It would also mark the sixth straight quarter of slowing growth.

They expected 2012 full-year expansion of 8.2 per cent, 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 per cent and the one-year deposit rate by a similar amount to 3.25 per cent 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 per cent of the benchmark rate and offer rates on new loans for as little as 80 per cent of official policy rates, an additional 10 percentage points of leeway from the current 90 per cent limit.

Commercial banks until now have been barred from charging rates on deposits higher than the benchmark set by the central bank.

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 per cent from a year earlier, picking up from a 34-month low in April of 9.3 per cent, 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 per cent, little changed from 20.2 per cent in April’s data covering the first four months of the year.

The rate cut follows a decision to accelerate key investment projects, announced by Premier Wen Jiabao at a regular cabinet meeting on 23 May.

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 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.