China interest rate cut over concerns on unemployment

The central bank lowered China’s one year lending rate by most since 1997, less than three weeks after Premier Wen Jiabao unveiled the $586billion stimulus plan. This interest cut was the biggest in 11 years highlighting the governments concern for spiraling unemployment, social unrest and the deepest economic crisis in almost two decades

“China’s trying to draw a line under unemployment and civil unrest,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “It’s the most challenging set of circumstances Beijing has had to face since late 1989 that culminated in the protests in Tiananmen Square.”

Zhand Ping, chairman of the national development and Reform commission added to this saying that its “the nation’s top policy priority is maintaining growth to create more jobs.”

The central bank cut the key one-year lending rate 108 basis points to 5.58 percent. The deposit rate fell by the same amount to 2.52 percent.

China passed the UK in 2005, becoming the world’s fourth largest economy. The growth averages an astonishing 9.9% since 1978 allowing china’s economy to expand 68 times since 1978, when the free market reform began.

In 2007, the gross domestic grew 11.9% but analysts have predicted this number to fall to 5.5% next year, the slowest since 1990 where it only grew 3.8%.

China, being the world’s most populous nation, must aim for at least 8% growth to provide enough jobs for its fast going population. Exports haven’t been helping either as they are suffering from the recession in the U.S, Europe and Japan.

“Employment is being impacted by factory closures and many migrant workers are returning to their home towns,” Zhang said.

China is doing whatever it can to keep urban unemployment below 4.5%, even though it’s the highest in the past decade. This is mostly due to the closure of two-thirds of small toy exporters, the customs bureau said this week.

“Twenty percent of migrant workers may lose their jobs and in some provinces it is already at that level,” said Andy Xie, an independent economist in Shanghai who was formerly Morgan Stanley’s chief Asia economist. “When they return to their villages we don’t know how these things might work out.”

This number might still grow due to the recession so let’s hope something can be done to stop this rapidly growing unemployment as it is essential for the upturn of the economy.