Editorial, "Reading Direction of Chinese Economy"

KOMPAS 27/10 Page 6, -- China again cut its benchmark interest rate for loans by 0.25 percent basis point to 4.35 percent, Saturday (24/10).

In the past year, China had lowered interest rates for loans and deposits six times. How do we read this step and what does it means for us and the global economy?

First, monetary easing indicates Chinese concern over the possibility continuing economic slowdown although on the surface, they express optimism they will still be able to maintain growth of 6-7 percent per year until the next 3-5 years.

Second, China's rate cuts put pressure on the US central bank (the Fed) to delay a rate hike at this week FMOC hearing. Not to mention, previously, the European Central Bank (ECB) and Japan also showed the new stimulus signals (including monetary easing through interest rate reduction) to prevent their economies slide into recession.

Third, we need to be aware of the potential shocks that occur from rebalancing process that is now underway in China and the likely impact of adjustment policies that will be pursued in order to avoid the Chinese sharp economic slowdown (hard landing).

Chinese official statistics mentioned, the economy only went down slightly in the third quarter of 2015, to 6.9 percent, but the data was doubtful. Speculations suspect the real current growth of China only reached 3-5 percent, far below the target of 7.5 percent in 2015.

Through the decline in interest rates, lending to consumers and businesses are expected to increase so the slowing economy could be intercepted. However, the step to boost credit sparks another concern; the swelling bad loans, which in turn could lead to the country's financial crisis.

Chinese economy began to slow in last few years, following a growth of 10 percent per year in the three previous decades. On one hand, a more reasonable growth would be healthier for China because it is more sustainable, given the factors behind the dynamism of the Chinese economy itself also weakened. However, the biggest concern is, Chinese move toward a more reasonable growth does not go smoothly.

The fears of a hard landing of China leads to speculations that China will go for more extreme measures to prevent a hard landing or even recession. It is quite possible China will again perform devaluation.

We are entering a new period of uncertainty. In addition to uncertain US interest rates, the increased potential for recession in Europe and Japan as well as China's economic development must be anticipated early in order to avoid a destructive impact on the Indonesian economy. The Chinese factor cannot be ignored as a major influence on the global economy, as the second largest economy that contributes 17 percent of the world's GDP and is also the main destination of our exports.