Chinese Central Bank to the Rescue


By Joe Kearns

The People’s Bank of China has answered its call to action. Chinese economic growth declined from 14.2% in 2007 to 7.3% in the last quarter of 2014, prompting the PBOC to lower interest rates twice in the past three months. Additionally, the PBOC expanded its medium-term lending facility, a monetary tool from which individual banks can draw reserves for more liquidity. These measures attempt to reverse a declining property market and deflationary pressure induced by falling commodity and oil prices. UBS economist Wang Tao argues, “Against this backdrop, it would seem clear that monetary policy in China should be eased more aggressively.” Investors, however, appear to be comfortable with the current scope of the PBOC’s intervention, as fewer investors are betting that interest rates will change soon. Moreover, Wall Street Journal commentator Greg Ip warns that if the PBOC takes more aggressive actions like currency devaluation, it would not help global markets because China has strict controls limiting capital mobility. Has China resolved its problem or opened Pandora’s box?