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18 Sep 2008

International Economy

China cuts Interest Rates and Bank Reserve Requirements to Fight Economic (Current Issue No.2102)

The sluggish global economy and US financial crisis that haven't seen the light at the end of the tunnel have sent ripples across the USA and other countries, including the EU and Japan, which are China's key export markets, resulting in China's export sector slowing significantly. China's exports in August 2008 decelerated to 21.1 percent (yoy), compared to the growth of 26.9 percent in July 2008. Meanwhile, China's imports during the same month also decelerated rather substantially, to only 23.1 percent from 33.7 percent in July. China's slowing exports and imports have thus impacted other local economic sectors. In August, production in China's industrial sector declined to only 12.8 percent from 14.7 percent in July, representing the lowest growth in 18 months.
China's real estate sector is also in a downward trend. Real estate prices in China have decelerated after soaring for the last 2 years. In August 2008, real estate prices in 70 major cities in China fell to 5.3 percent growth (yoy), from the 7.0 percent growth in the preceding month. In addition, the US sub-prime mortgage market crisis has impacted many leading financial institutions in the US and intensified to become a global financial crisis. Large foreign companies investing in China's real estate may have to sell their holdings to maintain financial liquidity and affect the prices of real estate, plunging extensively and adversely, thus exacerbating problems in other sectors of China's economy. Apparently, these factors are posting some risks to economic growth of China this year.

Meanwhile, China's inflation rates are decelerating. Their Inflation rate in August was 4.9 percent, which reflects ongoing deceleration in growth for the fourth consecutive month, against the highest growth in the 12 years at 8.7 percent in February 2008. The decelerating inflation rate is however facilitating the Chinese authorities in implementing policies to maintain domestic economic growth in consumption and investment. In addition, the authorities have implemented measures to reduce the impacts of decelerating export sector in order to sustain the economic growth of China amid the global economic downturn. KASIKORN RESEARCH CENTER (KResearch) projects that the Chinese authorities, if necessary, will implement further easing in monetary policy and apply other fiscal measures to stimulate domestic economic growth over the remainder of this year. These will come along with many measures that have been launched to boost the economy, such as raising tax rebates for the export sector, expansion on credit quotas at commercial banks to small businesses. Also, on September 15, 2008, the Chinese authorities announced a decrease in their 1-year policy rate by 0.27 percent to 7.20 percent, against the previous rate of 7.47 percent, and a decrease in the banking reserve requirement by 1 percent, from 17.5 percent to 16.5 percent, in order to relieve the tight credit conditions that have affected the business sector of China. Those measures should help energize their economy. As a result, it is expected that the Chinese economy in 2008 will grow 9.8-10.0 percent, against the 10.4 percent growth in 1H08.

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International Economy