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Peoples Bank of China Cut Rates

Written by A Forex View From Afar on Thursday, November 27, 2008

The People’s Bank of China cut the interest rate by 108 basis points, down to 5.58%, the fourth interest rate cut in the last three months.

This was the largest rate cut in the last decade for the Chinese central bank. The last time the bank cut by this magnitude was during the 1997 Asian crisis, when many of the Southeast Asian countries were paralyzed by huge declines in the value of the national currencies and escalating foreign debt. Back then, the IMF had a couple of dozen countries knocking at their doors for a loan. The Chinese Government has also announced a stimulus plan, in order to support the economy. It is said, the rescue package will reach nearly $600 billion.

For the moment, the biggest threat for the Chinese economy is the high number of unemployed persons. Due to the global slump in demand, factories laid off workers to reduce costs. China, a country in which industrial production has had impressive growth during the past few years, has been hit very hard by the tough international business conditions. The Chinese unemployment rate is expected to rise to the highest level seen in the last few years. The official unemployment number is 4.2% for the moment, but this number does not include large populated areas from the rural parts of the country.

If China, which is practically the world’s back engine, is preparing for hard times ahead, having both the central bank and the government taking pro-active actions, means the world may face some very hard times. Currently, most central banks expect growth to pick up in the third quarter of 2009, but chances are, these estimates will be changed to a later date.

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