This is a guest report from Albert Tseng, who was an active Taiwan policy advocate for the last decade.

On Friday, November 22, the People’s Bank of China, China’s central bank, announced cuts in key interest rates for the first time in two years as a response to a slowing economy. The bank cut the one-year deposit rate from 3.0% to 2.75%, and the one-year lending rate from 6.0% to 5.6%.

Global markets rose on the news, along with news of further commitment from the head of the European Central Bank Mario Draghi to continue support of the European economy through monetary stimulus. Through policies such as these, monetary policymakers hope to stimulate businesses to borrow, invest in capital, and hire more workers, which should lead to overall economic growth. Similar policies in the US, enacted by the Federal Reserve Bank, have been controversial, with differing views on whether it has helped support the economy.

This year has marked a focus by the Chinese authorities on structural reforms, to tackle the problems of the real estate bubble, shadow banking, and bad debt in general. However, officials have received contradictory mandates to maintain GDP growth above 7.5%, while at the same time cracking down on the shadow banking and real estate bubble issues, the latter of which has created unaffordable, empty high-rise apartments in large-scale “ghost towns.” This past March 2014 marked an historic occasion as China allowed energy company Chaori Solar to default on its bad debt, instead of bailing it out.

Most financial institutions have lauded China’s direction this year, predicting that the Chinese Communist Party would be able to guide China’s slowing economy to a “soft landing” through similar judicious decision making. Others have disagreed, predicting instead a “hard landing” for China. A Credit Suisse report on Thursday argued that demand for commodities, a significant portion of which comes from China, has been underperforming.

Author and China watcher Gordon Chang has long predicted China’s inevitable collapse, with economic issues as one major piece of the larger puzzle of insurmountable pressures. He has frequently pointed out that stated GDP growth figures for China are suspect, citing figures that put China’s actual GDP group at around 2.0%. The latest rates drop, he says in an article on Forbes.com today, signals that Chinese leaders have no choice but “finally come to the realization that something had to be done” about the economy.

Furthermore, Chang argued that the relaxed rates will mostly benefit state-owned enterprises, and runs counter to China’s professed goals for structural reform.

With news of the interest rates cuts on Friday, it may appear that China has “blinked,” in its internal game of chicken, with the need to maintain apparent GDP growth overriding the fundamental need to guard against rampant bad debt and an unsustainable housing bubble.

(Feature photo of new development in Suzhou, China, by Donaldytong on Wikicommons, CC BY-SA 3.0)

 

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