China's first interest rate cut since 2008 is analysed by Kristina Sandklef, macro economist at Swedish manager East Capital.
As for proactive fiscal policies, the Chinese government has so far not announced any specific stimulus program to counter lower growth. Instead, the National Development and Reform Commission (NDRC) has accelerated the approval of projects as a way to bolster growth. These projects are mainly projects already outlined in the 12th Five Year Plan and are now made earlier than originally planned. On the long list of approved projects we find clean energy projects; three large steel projects to modernize and make steel production more energy efficient; telecom infrastructure upgrades; transportation projects including airports, railway, and local urban mass transit; water projects, including water treatment, irrigation, and water diversion; and special focus on “new strategic industries” within the fields of energy efficiency and environmental protection, next-generation information technology, biotechnology, high-end manufacturing, new materials and new-energy vehicles.
At the same time, several cities have started different local incentive programs to encourage the real estate market. Some of them include cash incentives for first time buyers, whereas other cities offer tax reductions.
As for consumption, there are several consumption stimuli programs coming up. For example, there is a subsidy program for purchasing of energy saving household appliances at RMB 26.5 billion and RMB 6 billion in subsidies for hybrid cars.
So how much should we worry about the Chinese economy? I believe that we should not worry too much in the short term. With all these stimulus coming up, it is likely that the Chinese economy will recover and get back on track at approximately 8 percent annual GDP growth after falling growth in Q2, which is expected to be somewhere between 7 and 7.5 percent. For the medium and long term economic growth, it is important that China embarks on reform programs to restructure its economy. In that perspective, launching a massive stimulus program as in 2008 would not be very wise, but it seems like the Chinese policy makers are aware of that.