China cuts interest rates

China’s central bank has done something that it hasn’t done since 2008 and that is cut interest rates to encourage more growth in a country whose metoric economic expansion seems to be fizzling out.  China’s one-year lending rate is now 6.31% which is higher than the interest rates in the U.S., Europe and Japan.  China is now the second largest economy in the world (behind the U.S.) and economists are concerced about decaying growth because in a time in which many developed countries are expereincing recessions, China’s growth is important.

This wasn’t the first time the Chinese central bank tried to spur growth, on May 12th, the bank reduced the amount of cash banks must hold in reserve.  The goal of this move was to free up lending and investment funds.  However the move failed to spark the economy back into rapid expansion hence their new decision to lower rates.   Some might argue that the move to lower interest rates won’t stimulate the economy because, after all the U.S. lowered interest rates and there is very little growth.  Though that is an understandable critique, it should be noted that unlike the U.S., whose interest rates were already low when the Great Recession hit, China has had relatively high interest rates when compared to the rest of the world, so a decrease in interest rates would have more of an effect on their economy than when the U.S. Federal Reserve did the same thing.

For some more comparision between the Chinese interest rates and the rest of the worlds, the key interest rate for the Federal Reserve has been close to zero since the crisis began, the Bank of England’s key interest rate is 0.5% and the European Central Bank is 1%.   The goal of the Chinese government is to get the growth rate back to around 7.5% which sounds great compared to the U.S. but the Chinese government won’t be happy if they only reach that number.  The main reason is by looking at recent history when the Chinese growth rate was at 6%, there was massive job loss in China due to factory layoffs.

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