China cut interest rates unexpectedly on Friday, stepping up efforts to support the world's second-biggest economy as it heads towards its slowest expansion in nearly a quarter of a century.
The cut, the first in over two years, came as factory growth has stalled and the property market, long a pillar of growth, has remained weak, dragging on broader activity and curbing demand for everything from furniture to cement and steel.
"It's comes right after China's disappointing PMI figures showing that manufacturing activity is getting dangerously close to contraction," said Alexandre Baradez, chief market analyst at IG in Paris, referring to a private factory survey this week which added to worries about slowing global growth.
"China's central bank is now following the path of the Fed, the ECB and the BoJ. Central banks are really driving markets," he said.
Just a few weeks ago, Chinese President Xi Jinping had assured global business leaders that the risks faced by China's economy were "not so scary" and the government was confident it could head off the dangers.
In a speech to chief executives at the Asia Pacific Economic Cooperation (APEC) CEO Summit, Xi said even if China's economy were to grow 7 percent, that would still rank it at the forefront of the world's economies.
The People's Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent. It lowered one-year benchmark deposit rates by less - just 25 basis points. The changes take effect from Saturday.
"The problem of difficult financing, costly financing remains glaring in the real economy," the PBOC said.
LIMITING THE IMPACT
The central bank also took a step to free up deposit rates, allowing banks to pay depositors 1.2 times the benchmark level, up from 1.1 times previously.
"They are cutting rates and liberalising rates at the same time so that the stimulus won't be so damaging," said Li Huiyong, an economist at Shenyin and Wanguo Securities.
Recent data showed bank lending tumbled in October and money supply growth cooled, raising fears of a sharper economic slowdown and prompting calls for more stimulus measures, including cutting interest rates.
But many analysts had expected the central bank to hold off on cutting interest rates for now, as authorities have opted instead for measures like more fiscal spending, as they also try to balance the need to reform the economy.
Chinese leaders have also repeatedly stressed they would tolerate somewhat slower growth as long as the jobs market remained resilient.
More recently, the central bank injected cash into the system in the form of short-term loans to banks in an attempt to keep down borrowing costs and encourage more lending even as bad loans increase.
But a growing number of economists said those moves were not translating into either lower financing costs or more credit for cash-starved Chinese companies.
Analysts expressed doubts over whether the impact of the rate cut would find its way into the real economy, either, as the cooling economy makes lenders more risk-averse. Some predicted multiple cuts would be needed well into next year.
Hurt by the cooling property sector, erratic export demand and slackening domestic investment growth, China's economy is seen posting its weakest annual growth in 24 years this year at 7.4 percent.
China's rate move comes after the Bank of Japan sprang a surprise on Oct. 31 by dramatically increasing the pace of its money creation, while European Central Bank President Mario Draghi shifted gear on Friday and threw the door wide open to quantitative easing in the euro zone.
"There is definitely more concern around about the state of the global economy than there was a few months ago, you see that not just when you talk about Europe," British finance minister George Osborne told an audience of business leaders in London on Friday.
AUTHORED BY KOH GUI QING AND JASON SUBLER VIA REUTERS.COM.
(Additional reporting by Jake Spring; Editing by Jacqueline Wong, Kim Coghill and Mike Collett-White)
Nowhere other than inside the Pentagon will you find more truth in Machiavelli’s warning about the hazards of change: “There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage… For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new.”
Which was why my response to Deputy Defense Secretary Bob Work’s arrival involved a reference to Raymond Chandler’s Big Willie Magoon, a vice cop who “thinks he’s tough.” The arrival of someone with genuine strategic and technical chops at the upper level of the Defense Department was such a good idea that a lot of people were guaranteed to respond with equal parts rage and terror.
Work’s co-thinkers have now run the pirate flag up the mast with the publication of a concise and hard-hitting report by the Center for Strategic and Budgetary Assessments that details what Work has called a Third Offset strategy for towing the Pentagon out of the strategic quicksand into which it is steadily sinking today.
My compressed version of the CSBA report is here, along with an explanation of the innocuously wonkish “Third Offset” name by which the new strategy is known. But to be even briefer, this is the gist of the strategy.
Widely available weapons—this is not all about China—are threatening the U.S. ability to project power and influence events worldwide. Those weapons include guided missiles, satellites, and drones that can track ships in mid-ocean, and long-range surface-to-air missiles.
Rather than wading into a symmetrical fight against those weapons, the Third Offset strategy exploits U.S. and allied core competencies—not just the things we do well, but areas where we can maintain our lead for a long time, and without adding to the defense bill. Think advanced unmanned vehicles, all-aspect, broadband stealth, and undersea warfare.
Third Offset calls for some new weapons, none of them miraculous, some of them a little more specialized than those that have been planned in the last decade or two.
As a strategy, it has the enormous merits of focus and consistency, which is why there are people and groups who are going to hate it and try to stop it from happening.
The strategy exploits not just the things America does well, but areas where we can maintain our lead for a long time. Think advanced unmanned vehicles, all-aspect, broadband stealth, and undersea warfare.
First among these will be the boot-centric warfare (BCW) crowd, whose admiration for the military theorist Carl von Clausewitz has blinded them to the fact that our world is not Clausewitz’s, where armies ruled and the war was won when the enemy’s capital was occupied. They will not be mollified by another new CSBA report that proposes an expanded Army role in providing offensive and defensive regional missile support. They will portray Third Offset as the intellectual stepchild of one of those nutty airpower cheerleaders, and not the kind of warfare performed by Real Warriors.
This is not completely inaccurate. Third Offset reflects the views of people inside and outside the Pentagon who see large-scale BCW, particularly in a counter-insurgent role against cultures that revere martyrdom, as akin to wrestling a pig: You both get covered in slime but the pig enjoys it.
Next will be the peace-hawks. No, Third Offset does not advocate war with China. It seeks to prevent war with China, or any other nation that wants to exploit anti-access and area denial to further its own interests at the expense of the global community. In the classic phrase of deterrence, we want all such actors to wake up each morning and think: Not today.
The fighter generals and the advocates for the biggest program in Pentagon history, the F-35 Joint Strike Fighter, will not be much happier. Lord knows I am not a Joint Strike Fighter fan, but I have yet to call it “semi-stealthy” as the CSBA report does. The report also suggests that the Navy’s F-35C might be usefully canceled. But the critique is deeper: In some scenarios, it matters little if the adversary’s fighters can’t defeat F-35s directly. Shoot down or drive off the tankers and the fighters never make it back.
Some naval aviators will be at best skeptical of the report’s embrace of carrier-based unmanned combat air systems. They should not be surprised: Work himself co-authored an early and influential study of Navy advanced drones at CSBA, identifying range as a critical factor in an anti-access/area-denial environment.
The Navy’s surface-combatant community and the U.S. shipbuilding enterprise will be clearing the decks for action. Third Offset strongly favors the submarine and implies that, as missile threats become more intense, the weapon tubes on surface warships will fill up with defensive interceptor missiles, leaving only a handful of weapons to fire at the enemy.
The CSBA report says little about the Marine Corps and never mentions the F-35B—the Corps’ version of the Joint Strike Fighter. However, it does mention all the short-range anti-access weapons, like guided rockets and mortars, weapons that Work (a retired Marine himself) talked about in his CSBA and Navy years as representing a very difficult challenge for amphibious warfare in general and the F-35B in particular.
Third Offset is not policy. Yet. But it’s an important and coherent starting point for a discussion that is long overdue.
Authored by Bill Sweetman via thedailybeast.com.