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Mid-Year China Check-In

Last year, 2011, was a noticeably slower growth year for China as the government implemented a host of restrictions on loan growth, real estate investment and more. These measures seemingly played a major contributing role in decelerating growth rates throughout the year.

The first quarter's 8.1% GDP growth isn't slow by most any measure, but it's slower than China's seen in recent years. The second quarter's 7.6% is similarly fast relative to the globe, but clearly not as hot as in prior years.

China's Year-Over-Year GDP Growth Rate

Also decelerating? Inflation, which slowed from over 6% year over year in mid-2011 to just 2.2% last month. This disinflation is one part of China's goldilocks scenario, giving room to boost lending without overheating the economy.

So it's unsurprising that as inflation has cooled, China has begun reversing 2011's tightening efforts.

Recall, in December 2011 the government first loosened loan quotas, and loan growth responded by accelerating for the first time in a year that month. After a relatively muted start to 2012, March loan growth surged to 1.01 trillion yuan. April loan growth was tepid, but the biggest May loan growth figure on record followed. June loan growth demonstrated continued strength, rising 285 billion yuan to 919.8 billion yuan.

Additionally, the People's Bank of China for the first time in eight years, cut one-year interest rates in June, by 0.25 percentage points. Subsequently, the PBOC cut another 0.31 percentage points in early July.

These two rate reductions have been paired with two successive reductions in the lending floor rate -- the minimum percentage of the benchmark rate banks can lend at to attract borrowers -- a move designed to magnify the rate cuts' effects.

Additionally, the PBOC announced it would delay implementing Basel III capital requirements until 2013 and reduce risk weightings for loans to small businesses, a move likely forestalling potential Chinese bank deleveraging and allowing needed capital to continue flowing to businesses.

Now, as GDP illustrates, we've yet to see these measures fully translate into acceleration in data, which isn't unusual, considering monetary policy normally takes time to work its way through an economy and be reflected in official data.
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