Economists who predicted that China's economy would rebound after hitting a bottom in the second quarter are perplexed about when this might finally happen after the People's Bank of China, the country's central bank, announced surprise cuts in the benchmark interest rates for the second time this year, to prevent a hard landing for the economy, the Beijing-based Economic Observer reports.
The central bank announced on July 5 that the benchmark yuan deposit and loan interest rate would be cut on July 6, signaling a risk of a hard landing for China's economy.
Despite this, most economists predict that the country's economy will not experience a hard landing. Beijing is using every means to prevent this. Over the past six months, the series of policies introduced to maintain economic stability are evidence of the efforts being made by the government.
Chen Dongqi, the director of the Macro-Economic Academy under the National Development and Reform Commission, China's economic planner, said the central bank's recent interest rate cut was made at the right time. Chen said previously that the risk of a Chinese economic decline was high and if the government did not roll out policies to address this in time, GDP growth could drop to under 7% this year.
The interest cut is an important signal that the Chinese government is making every effort to prevent an economic hard landing, the Economic Observer said.
There are signs that the Chinese government's tolerance for an economic slowdown is increasing. The problem is the extent to which the government can tolerate this decline and whether the country can maintain stable economic growth. These depend on two factors — employment and commodity prices, says Zhu Baoliang, an economist from the State Information Center.
Currently, the employment situation is stable despite a difficulty in recruiting workers and rising labor costs. Overall economic growth is within a reasonable range, Zhu said. Meanwhile, commodity prices have gone up about 1.2% and industry has experienced overproduction. Real economic growth was slightly lower than potential growth, making it necessary to stimulate the economy, Zhu added.
"Generally speaking, 8% economic growth is adequate to maintain stable employment and commodity prices, and is close to the 7.5% growth target for this year," Zhu said.
Market experts believe however that the current interest rate cuts will have limited effects on saving China's economy. Lian Ping, the chief economist of Bank of Communications, said the interest rate cuts were mainly aimed at boosting enterprises' willingness to invest by reducing their financial costs and promoting economic growth. However, several economists feel the biggest problem facing China's economy is anemic domestic and foreign demand.
Since the beginning of this year, economists have tried to predict when the economy will bottom out, concluding that it could happen in any of the four quarters. In April, economic data for the first quarter of this year was introduced and showed a lower-than-expected 8.1% economic growth, the lowest since spring 2009.
Chen Dongqi had predicted that China's economy would continue to decline at a higher than expected speed. "Q2 economic growth could fall below 8%. Unless more stimulus measures are introduced, this year's economic growth could even be less than 7%," he said.
Policymakers certainly believe there is a risk of a hard landing. The government therefore launched a series of stimulus policies to mitigate the slowdown, including lowering the required reserve ratio three times to release 1 trillion yuan (US$157 billion) in liquidity and announcing interest-rate cuts two times in the last one month.
However, everyone is watching closely whether the government will continue announcing such policies.
Before making policy changes, the Chinese government should evaluate the efficacy of the existing monetary policy and avoid making major changes, economists said.