China: the rate cut red flag

Chinese stocks plunged on last Friday, capping their biggest weekly fall this year. The Peoples Bank of China slashed that countrys benchmark interest rate by 25 basis points to 6.31 percent effective Friday, along with a slash on the deposits rate bringing it to 3.25 percent. The rate cut has deepened concerns that growth in China is sputtering and in need for major stimulus. Bad news had been piling up for the worlds second biggest economy prior to this announcement as well. Every indicator under the sun shows the Chinese bull-run is fast turning into a deer trot; timid and uncertain. Growth has slowed across most sectors in that economy; especially the manufacturing sector. In May, according to National Bureau of Statistics of China, Chinas manufacturing purchasing managers index (PMI) was 50.4 percent, down by 2.9 percentage points, month on month. During the month, all five sub-indices of the PMI fell; the new orders index fell by 4.7 percentage points, raw material inventory level down by 3.4 percentage points, employed person index down by 0.5 percentage points, supplier delivery time index dipped by 0.6 percentage points, and the production index decreased by 4.3 percentage points. To contextualise the significance of a persistent slowdown in China consider that the country contributes roughly 14 percent to the global economy. During 2002-05, China contributed 14.3 percent of the global economic growth. India, the other major emerging economy, raked up about 4.4 percent of this tally. During that period, the Chinese economy grew at an annual average of about 10 percent. By comparison, the World Bank expects economic growth to tally a modest 8.2 percent in FY12, according to a release issued on April 12, 2012. The WB cites weak demand for Chinese exports as the major drag on the Oriental giant. And the Chinese economy is not the only one faltering; headlines of the EU crisis and slowdown in US these days leave just enough space on newspapers front pages to mention that the Indian economy is also losing steam fast. Growth in India averaged just 5.3 percent in Jan-Apr 2012, much below the already modest target of 6 percent. The troubles in the advanced economies of the West have had many observers pinning hopes on the BRIC nations, particularly the Eastern giants. Now as China scrambles to bolster growth, alarm bells of further global economic weakening are sounding louder.