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China Shocks The World With Cut In Interest Rate


What has happened?

  • Earlier this week, on August 15, the People’s Bank of China (PBoC) sent ripples through global financial markets after it cut interest rates by 10 basis points.
  • The People’s Bank of China cut its rate on a one-year loan to 2.75% from 2.85% and injected an extra 400 billion yuan ($60 billion) in lending markets.

Slowdown in China

  • Retail sales, industrial output and investment all slowed and missed economists estimates in July.
  • The surveyed jobless rate for those aged 16-24 climbed to 19.9%, a record high and headache for the Communist Party,
  • As it gears up for a major congress in coming months that’s expected to give President Xi Jinping a precedent-defying third term in power.
  • Last month’s data showed China’s GDP expanded a mere 0.4% year on year (YoY) in April-June –
  • The slowest since the economy contracted by 6.9% in the first quarter of 2020 when it was confronted with the worst of the Coronavirus pandemic.

  • “July’s economic data is very alarming,” said Raymond Yeung.
  • The data suggest a crisis of confidence among Chinese businesses and households, adding another threat to the world economy as global demand for everything from Apple iPhones to luxury goods take a knock.

Why did China cut rates as others raise them?

  • The Chinese central bank’s decision to do so comes even as central banks around the world are tightening monetary policy to fight high inflation.
  • The RBI has hiked repo rate to pre-covid-19 levels of 5.4%.
  • While this would hurt growth, central banks believe it is more important to bring down inflation – which is over 40-year highs in some cases – as it is detrimental to growth in the medium- to long-term.
  • China, however, is currently not battling high inflation; at least, not the sort other large countries are witnessing.

How does it help India in global market?

  • With a number of countries adopting a China plus one policy, China’s losses could be India’s gain.
  • Resetting of the global supply chain following the covid-19 pandemic has brought India to the fore.
  • Developed countries are engaging with New Delhi to forge trade partnerships.
  • A prolonged slowdown in China could help India leverage the opportunity by negotiating better deals with major developed economies.
  • Australia’s worsening relationship with China pushed Canberra to focus on India, and more developed countries have shown interest towards the same including Canada, the European Union and the United Kingdom.

Impact of lower oil price?

  • India could benefit from lower oil prices, which are facing a downward trajectory due to concerns of a demand slowdown.
  • Brent crude eased below the $95 mark after economic data from China, the world’s largest crude importer, sparked global recessionary concerns.
  • However, this may help lower India’s import bill and may support the rupee.

Impact on India’s export

  • China is India’s second-largest trading partner, accounting for 5.04% of India’s total exports and 15.43% of India’s imports.
  • A lot of raw material used in India’s electronics, auto, and pharmaceuticals come from China.
  • With China occupying a large share in India’s export basket, demand slowdown there may further hit India’s total outbound shipments, which have sharply slowed down, growing just 2.14% in July.
  • Supply side disruption due to China may also fuel further inflationary pressures.

What the global agencies say?

  • Most global brokerages and multilateral agencies have cut the growth forecast for China, citing its zero-covid policy.
  • The World Bank in its report released in June said that China is expected to grow 3% in 2022 and 5.2% in 2023.
  • Goldman Sachs cut its forecast for China’s GDP growth this year to 3% from 3.3%

Q) In an economy, if Saving exceeds Investment, the National Income will?

  1. Fall
  2. Rise
  3. Fluctuate
  4. Remain constant




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