China Cuts Interest Rates for Third Time since December

China has cut interest rates for the third time in just six months as the country struggles with falling growth rates.  The People’s Bank of China cut interest rates to just 5.1%, a 25 basis point decline that is aimed at encouraging more lending, more borrowing, and more investment.

China has cut interest rates for the third time in just six months as the country struggles with falling growth rates.  The People’s Bank of China cut interest rates to just 5.1%, a 25 basis point decline that is aimed at encouraging more lending, more borrowing, and more investment.

Investment has slowed in the country, with a growing number of Chinese savers fleeing the real estate market. Chinese property values have been falling throughout 2015, with prices down 6.1% on a year-over-year basis, the National Bureau of Statistics announced in April. Only a few large cities are not seeing prices fall, including Beijing. In total, 49 of the 70 cities tracked by the NBS saw prices fall. Existing home prices fell in 48 cities, while rising in 12 cities.

While property has lost favor, equities have not. A growing number of Chinese are looking to invest in stocks, causing the Shanghai Composite Index to more than double in just one year, although a 4.1% fall in one day last week is leading some analysts to question whether the market was a fast-expanding bubble that is beginning to pop.

Weak Fundamentals

The growth in equity prices has not been tied to a commensurate rise in earnings or an expectation of a strong acceleration in total earnings growth, leading some analysts to argue that stock prices are not trading on fundamentals, which remain weak for the economy broadly. This has inspired many investment banks to release notes warning that China’s stock market is demand driven, and prone to failure.

This worry is compounded by mounting doubts that China can meet its 7% GDP growth target for 2015. China Premier Li Keqiang said the country will look for a 7% growth rate for the year, but a mixture of high municipal debt loads, falling real estate prices, and a fall in domestic demand is making that target look increasingly unlikely.

China’s once powerful manufacturing base is seeing intense pressure from both foreign competition and a fall in demand in the European Union, the country’s largest trading partner, as well as in Japan and the United States, where tepid growth has remained the baseline since the 2008 global financial crisis. As a result, exports fell 6.2% on a year-over-year basis in yuan-denominated terms, according to China’s Customs Department.

Demand at home is not picking up the slack in demand abroad, as imports fell at an even faster rate—down 16.1% year-over-year—even after falling for four months in a row at a rate over 10%. The country’s trade surplus has thinned to just 210 billion yuan, or about $32.4 billion.

Because of weakness, the International Monetary Fund recently said they expect China’s growth to fall and stabilize at 6% in two years, while the PBOC has admitted, “China’s economy is still facing relatively big downward pressure.”