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Impact of China’s Rate Cutting Policy on the Global Market

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By on Intl News

The global stock market went down last Friday but thanks to China’s cutting in interest rates for two consecutive years, it prevented a sudden sharp decline in the economic growth of the stock market. The Bank of People’s Republic of China took the decision when rumors were spread regarding the weakening of China’s economy. The Bank of China declared to lower its one year benchmark of money lending rate by almost 0.5% to 5.6% and will also cut its one year deposit rate.

On Friday the FTSE closed at 6750.76 with 1% increase rate even when the Dow jones had also been traded high. According to the experts one of the main reasons of this action could be to lower the value of Yuans in the international market against Dollar and Yen. This will be increasingly helpful for the Chinese economy increase its annual exports. Moreover the Dollar had already risen 10% against the Dollar from an overvalued position since the last summers and may further fall as US economy struggles in the recovery stage.

This is because the Chinese economists want positive balance of payments for their country. This lowered interest rate will be highly appreciated by hundreds of millions of Chinese home owners who have to regularly pay mortgage in huge amounts from their salaries. The huge debts and loans by the local authorities and entrepreneurs alongside the increasing mortgage debt rate has become a huge problem for the Chinese economy.

The Central Bank of China’s officials are aware of the fact that if they reduce spending their income on other things, it will greatly help in lowering other costs. Reduced and cut in money deposits, rates will persuade them to do the same in other parts of the economy. This was earlier signaled by the British Prime Minister David Cameron as a red warning that the Global economy is on the verge of another financial crash. He said that alongside the problems of the Ebola virus and Ukrainian dispute, the fluctuating economy is another major problem.

According to the Chinese economists the estimated growth rate will be above 7% if the GDP growth continues to hold above 7%. This however has been the slowest growth for the Chinese economy in the past 5 years and the rate has been steady at 5%. However this rate of expansion is almost double to the UK’s rate of increase in the economy. The experts maintain that if China wants to keep up the development with its population it has to have a steady GDP growth rate of 6%.

According to the expert Marc Ostwald who is a strategic broker at ADM ISI, these rate cutting actions by the government can start a global economic war. He expects a harsh response from South Korea and other South Asian countries including India’s Central bank to adopt the policy of rate cutting as well. The ECB head Mario Draghi said that he also intends to adopt the cutting policy to stabilize the Euros.

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