Why China needs a new approach to boost consumption

By

Dec. 4 2014, Updated 12:01 p.m. ET

Policy favored investment over consumption in China

The news of the rate cut by the People’s Bank of China (or PBoC) marks a change in China’s central bank approach.

Until now, PBoC has supported growth in the economy by providing liquidity to specific industries. It had been channeling credit to sectors that it deemed important for China’s growth, including small and rural businesses as well as government-financed low-income housing projects. The approach has focused more on investments than on consumption in China.

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China requires a change in approach

An economy-wide interest rate cut usually benefits investments as well as consumption in China. The provision of liquidity to specific industries has helped bring down borrowing costs (the more credit availability, the lower the borrowing cost). So investments inflated while consumption shrunk, leading to unbalanced growth.

Growth in China is tracked by ETFs like the iShares China Large-Cap ETF (FXI), the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), and the iShares MSCI China Index Fund (MCHI). Investors in the SPDR MSCI World Quality Mix ETF (QWLD) or the iShares MSCI ACWI Index Fund (ACWI), however, should keep an eye on market-moving events in China. Events in China can have repercussions on the global economy.

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