Saturday, November 22, 2014

China Stimulates Economy to Keep Deflation at Bay

Experts predicted the Chinese economy to slow down for the last five years but it never happened-until now. Instead, the economy continued to grow and develop moving from copying technology to inventing some of their own. As the world’s No. 2 economy it has recently recognized that significant slowing in Asia and Europe may be hampering its own growth and it is taking precautionary measures to prop up its position. 

In an attempt to support development and investment it slashed interest rates at the time when American’s have weaned themselves off easy money policies. By injecting credit into their financial system they hope that their banks will lend more money and encourage higher levels of investment. The interest rate on the one-year loan has been reduced to 5.6% while the rate of pay on a one-year savings rate is now 2.75%. 

A low interest and saving rate combination incentivizes borrowing money for growth while discouraging the hoarding of cash by more profitable businesses. Through keeping the money flowing in and out of large banks it sparks higher levels of economic activity. It is believed that lower lending and borrowing rates will spark higher levels of investments. 

China’s economy has been growing through cheaper production costs and higher levels of investment. As the world experiences a slowdown and major nations are stimulating their economies China has decided to jump onboard.  Only the U.S. is projected to keep growing. 

With a growth rate of 7.3% and a decline in housing value the Chinese economy slowed. It is still an impressive number and the Chinese sought to weather into more sustainable growth pattern but a global slowdown has them on edge. China must continue to export at significant levels or risk moving into a deflationary position.

No comments:

Post a Comment