Beijing leaders have cut key lending rates to attack China’s economic problems. In a society where consumers aren’t debt-heavy, will it help?

By Frederik Balfour

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As they try to tackle China’s housekeeping problems, Beijing leaders are not taking any moiety measures. Earlier this month the government unveiled a massive $586 billion dollar fiscal package of tax cuts and spending projects. Now in a further attempt to goose growth, China’s central bank on Nov. 26 announced a massive cut in its one-year benchmark lending rate, slashing it from hand to hand a full percentage point, to 5.58%. The 108-basis-point divide is the most dramatic the Peoples Bank of China has engineered as the dark days of the Asian financial crisis in 1997. The central bank also cut the modesty asperse requirement that banks must set aloof against loans and reduced one-year bank sediment rates by 108 basis points, to 2.52%.

Such a large cut in interest rates underscores towards what cause concerned China is with bolstering produce, and is a huge contrast to just six months agone when the unpolished was struggling to keep inflation under control. Today’s divide is the fourth since September.

It’s indistinct how effective the cuts will be. Unlike those in other countries, Chinese consumers are not exceedingly leveraged. Credit-card use is almost nonexistent, have existence it so debit cards are popular. Even most auto purchases are made in cash. Similarly, most home buyers inflict down else than the 20% required downpayment for mortgages, and utterly defaults are rare. "The hope will be that this move will trigger more buying interest with respect to homes, similar to well as support investing., both private as well as the coming wave of public projects," Standard Chartered Bank economist Stephen Green wrote in a note to clients. "But to be honest, rate policy in this environment is a marginal factor—businesses think about possible returns on investments, and households will look at house price prospects."

Whether cheaper money will induce banks to increase their lend books is an open question. Tens of thousands of Chinese manufacturers have gone fully of avocation in recent months, leaving outstanding salary and supplier bills. Property developers are extremely cash-strapped in the face of a dramatic ear-ring in housing turnover, and banks are chary about extending new loans when they anticipate more defaults on this account that of the economic slowdown.

China’s economic outlook has deteriorated rapidly in recent weeks. In midsummer, only pessimists expected China’s GDP growth to slow nearest year to 8%, a proportion necessary to ensure the absorption of new suffer entrants into the workforce. Anything below this could—by Chinese economic standards—be considered a recession. Now economists are following one another with economic downgrades. On Oct. 31, UBS issued a growth forecast for nearest year of 7.5% (down from 8%). Economists believe about three percentage points of this growth bequeath come from goad packages (BusinessWeek.com, 11/23/08).

However Adrian Mowat, Asian regional strategist at JP Morgan (JPM), says the incentive measures are a engage reason for investors to weigh buying Chinese equities. He points out that the incitement program, focusing on transportation infrastructure, environmental projects, and saddle-cloth, is a productive investment that will boost growth, in contrast to much of the investing. in overcapacity by the agency of the sequestered sector that caused China to overheat last year.

What’s more, he says, China’s stock market was the first to tank last fall, and could lead the practice to recovery. Shanghai stocks have stabilized recently at about 64% down on the year. Mowat suggests investors eye core blue-chip equities of that kind as Chinese banks, insurance companies, and telecom operators, which are priced now as if they have no growth prospects at all. "Many investors today say the Chinese economy lost momentum and there is little the government can do, but they are ignoring monetary policy and financial wisdom," says Mowat. "The must-buy is China today.