Peterson’s Lardy Says China Rate Cut May Signal Weak Economy

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, comments on China’s decision to cut benchmark interest rates for the second time in a month.

“I have not seen the precise details of the cuts but would argue that they are cutting again because the economy is weaker than expected.”

“The authorities certainly have up to the minute data on loan growth, presumably showing weak credit growth, and they probably have a preliminary second-quarter GDP number that shows the economy is much weaker than in the first quarter, something I have been anticipating for quite some time. With very weak export growth and a moderating pace of investment in housing, the economy inevitably weakens.”

“Why so soon is probably because when the demand for loans is weak, as now, it takes larger cuts in lending rates to generate any response.”

“I have been skeptical for months that the economy was going to pick up. First, after the first-quarter numbers came out, lots of investment bank analysts forecast that the second quarter would show an upturn. Now they are saying the second half. I doubt that this can happen since I believe Europe is weakening and not likely to show any recovery for quite some time. And housing looks weak.”

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