A day after China's central bank cut benchmark interest rates for the first time in three years in a move that raised concerns over a bigger than expected slowdown in the Chinese economy, the government announced a second cut in fuel prices in under a month to curb inflation and widen its policy options to stimulate growth.
The move to lower prices of petrol by 0.39 yuan (Rs.3.40) a litre and diesel by 0.44 yuan (Rs.3.83) a litre were welcomed by Chinese consumers, announced a day before grim economic data for May was expected to be unveiled.
The price of petrol is now $1.06 (Rs.58.30) a litre, down from $1.17 (Rs.64.35) in March. Officials said the falling price of crude drove the cut, and further cuts could be expected depending on the global situation. “The latest cuts will help ease inflation and boost relevant industries,” Lin Boqiang, an economist at Xiamen University, told the official Xinhua news agency.
According to official data, inflation fell to 3.4 per cent in April, down from 3.6 per cent a month earlier, and was expected to continue to ease in May.
For Chinese officials, keeping inflation in check is a top priority, not only to enable the government to employ a wider range of policy options to stimulate a slowing economy but also to ensure stability during a crucial year of political transition.
An official from China's National Development and Reform Commission (NDRC) last month ruled out another stimulus measure to inject momentum into the slowing Chinese economy.
While the government has announced measures to spur investment in infrastructure projects to drive growth this year, Chinese analysts have also expressed concern over excessive fixed asset investment citing the $586-billion stimulus package of four years ago that was seen as worsening economic imbalances and leading to an overcapacity problem in many sectors.
On Thursday, the Chinese central bank announced a lowering of benchmark rates on one-year loans and deposits by 25 basis points and greater flexibility for banks to float rates, a move that was welcomed as a long-awaited step towards liberalising interest rates.
Many analysts, however, saw the move as being triggered by fears of a slowdown rather than any push forward for reforms. “Yesterday's interest rate cuts signal a government increasingly panicked by the domestic slowdown and rocky external environment,” said Alistair Thornton of IHS Global Insight.
“China is able revitalise its economy, but the more the government leans on the tried-and-tested tools of investment spending and credit issuance, the more they complicate the medium-term rebalancing picture.”
“The government's loosening to date has been extremely cautious for precisely this reason — the implications of over-stimulating once again are severe,” he added.
“Unfortunately, it seems increasingly likely that more aggressive policy is needed to reverse the slowdown.”
