Question

What will be the effects if People’s bank of China decides to lower the short-term borrowing rate by 0.5% to

(a) A corporate based in Shanghai?
(b) A multinational corporation that have operations in both Beijing and Boston?

(c) A corporate that only operates in Boston and have no operation or export in China?

Answer 1

(A) If People Bank of China has decided to lower the short term borrowing rate by 0.5% and there is assumption that the banks has passed full of this rate cut to their clients then a corporate based on Shanghai will benefited because they can get loan at lower rates.

The period of low-interest rates makes investment financed by borrowing more attractive. With lower interest rates investment gives a relatively better rate of return because the cost of borrowing is low. At a low rate of investment, more projects will have a rate of return higher than the cost of borrowing.

(B) If People Bank of China has decided to lower the short term borrowing rate by 0.5% then the Multinational corporation who are working in Shanghai and Boston will get cheaper rate of interest for their Shanghai unit. They can manufacture the products at cheaper rate than their Boston unit because of lower cost of funds. Because of lower interest rates and a manufacturing hub Shanghai can go for sale their products globally at a competitive prices. This cut will also spur the fund movement to other emerging markets. This cut has also increase forex reserves but of increase in foreign Trade.

(C) A corporate that only operation in Boston will may face challenge from cheaper prices of goods supplied by Chinese manufacturers. The rate cut will also spur growth for Chinese manufacturers to operate in USA and offer competitive prices. There will be some impact on Currencies of USD and Chinese Yuan.