It Is Clear Now That China Is Headed For A Hard Landing

Thursday, June 7, 2012
By Paul Martin

Mike “Mish” Shedlock
Jun. 7, 2012

China surprised economists today with a surprise cut in interest rates by a quarter point, the first cut in rates since 2008.
Just a couple of months ago, few analysts had forecast that Beijing would cut rates, believing that China was on track for a “soft landing”. But after growth slowed to 8.1 per cent in the first quarter, recent data showed the economy was on track for a sharp deceleration.

With the cut, China’s benchmark one-year lending rate will now be 6.31 per cent, while the one-year deposit rate will be 3.25 per cent.

The People’s Bank of China, which raised interest rates three times last year, had previously characterised its monetary stance this year as “fine tuning”, arguing that nothing dramatic was needed to support the economy. The rate cut marks a definite change.

The question now is whether businesses and households will respond to the lower rates by borrowing more. Banks have reported weak loan demand over the past two months.

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