HEARD ON THE STREET: China Rate Cut Speaks To Domestic Pressures

   By Denis McMahon 
   A DOW JONES COLUMN 
 

It is tempting to argue that Wednesday's en masse central bank interventions show that China's priorities are now more fully aligned with those of stricken western economies.

Although China's rate cut wasn't coordinated with the other central banks, its timing might suggest that the world's major central banks are all pulling on the same oar.

But in truth, China's move was more a reaction to domestic pressures than a show of unity in the face of a global threat. The People's Bank Of China is aggressively loosening monetary policy, an abrupt about-face after years of tightening, because China is concerned with its own deteriorating economy.

China's still way ahead of the curve with analysts broadly expecting economic growth to remain above 8%, albeit down from levels in excess of 11% last year. Still, corporate profits are weakening, property sales are down, and the long-suffering export sector - buffeted by a year of high input prices, a strengthening yuan, and tight credit - is now facing the prospect of both the U.S. and the E.U. sliding into recession.

Having appreciated an unprecedented 7% against the dollar over the first half of the year, the yuan saw gains come to an abrupt halt in mid-July in what was widely regarded as a broader move to keep the spotlight off just about anything that wasn't related to the Olympics.

The clearest signal from the PBOC's overnight action is that continued stability, or at best only a modest appreciation, of the yuan will be policy for the foreseeable future. That won't please Washington, if Washington has the bandwidth to care right at this moment. But, by stabilizing the yuan, Beijing may be doing the world an inadvertent favor.

Premier Wen Jiabao has said China's greatest contribution to helping resolve the world financial crisis is to prevent a sharp slowdown in the country's economic growth. With other global engines of growth sputtering, that's not to be sneezed at.

It's not quite the same altruism the country displayed during the 1997 Asian financial crisis. Back then, China chose not to depreciate the yuan despite the collapse in the currencies of its neighbors, thereby providing support to its competitors' export sectors.

At the time, China was roundly praised for its good global citizenship. It probably can't expect a repeat if it puts the yuan on ice.

(Denis McMahon covers macro economic and policy news for Dow Jones Newswires in Shanghai. He can be reached a +86 21 6120-1200 or by email: denis.mcmahon@dowjones.com )

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October 09, 2008 03:56 ET (07:56 GMT)


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