In a year of unpleasant surprises from China's economy, here's a development we should have foreseen: The central bank lowered interest rates. With growth disappointing and prices declining, Tuesday's easing from the People's Bank of China ought to have been a no-brainer.
That such an official response to the country's dour performance is considered a jolt speaks volumes about the opacity with which the PBOC operates, relative to its big-power peers. It also says a lot about how much expectations need to be reset. The world has become so accustomed to a China that turns in enviable economic results that it's hard to get our heads around what happens when slow growth becomes the norm rather than the exception.
The monetary authority reduced the rate on one-year loans by 15 basis points, a slightly bigger cut than the one undertaken in June, but a relatively modest adjustment by the standards of the Federal Reserve and the European Central Bank. Moves up or down in borrowing costs among that August group tend to be in increments of a quarter or half-point. The PBOC has elected to startle with a fraction of that. Just one of the analysts surveyed by Bloomberg News forecast it.
Most reports point to an economy that, far from roaring back from Covid Zero, is struggling to make much headway. Less than an hour after the PBOC announcement came another slew of downbeat data: industrial production softened in July, retail sales rose much less than anticipated, property investment continued its losing streak and unemployment ticked up. (Troublingly, the National Bureau of Statistics said it will suspend the publication of youth jobless figures. Recent reports had shown a jump in the number of young people out of work.)
New PBOC chief Pan Gongsheng appears determined to prove that early assessments of him as hawkish were wide of the mark. Fair enough. In the monetary arena, its circumstances that shape policy rather than the predilections of governors. If Pan had opted to refrain Tuesday, what might have been on his mind? And why was the commentary geared toward a more conservative approach?
The PBOC isn't prone to dramatic departures and officials have made it clear that, while the economy could use some juice, they are wary of a buildup in debt. Beijing may also be keeping an eye on the yuan, which is down about 5% against the dollar this year, the biggest retreat among Asian currencies after the yen. The government doesn't want a rapid drop.
It's also unclear whether, with the property industry in dire straits and the economy suffering from a broad lack of demand, steep cuts in rates might transpire into a dramatic improvement. Capital Economics, the only firm polled that got the PBOC call right, reckons this latest reduction is only part of the picture. Stay tuned for more measures, wrote Julian Evans-Pritchard, head of China economics:
"On its own, rate cuts of this magnitude won’t have a big impact. They only partially reverse the recent increase in real interest rates due to lower inflation. But the PBOC tends to use changes in policy rates as a signaling tool, with the heavy lifting being done by other tools such as adjustments to reserve requirements and bank loan quotas. Today’s cut suggests that these tools will be deployed too, consistent with the PBOC’s promise of further monetary easing."
The flaws in China’s rebound are finally washing up on US shores. This recovery has been in trouble for a while, but the arrival of deflation in July looks like some sort of tipping point, at least in terms of public consciousness. Last week, President Joe Biden called the faltering expansion a “ticking time bomb.” Treasury Secretary Janet Yellen, far more circumspect, called the woes a “risk factor” for the US. It's open season now inside the Beltway. Fed Chair Jerome Powell will surely be asked about it at his press conference after the Federal Open Market Committee’s September meeting — if not before.
China's economy — shock, horror — moves in cycles. Viewed from a far distance, an expansion of 5% or 6% still looks good. But a downshift to something like 4% or, in time, 2% to 3%, seems like a disaster. This was always going to happen. Five years ago, the OECD took a crack at modeling the world through 2060. While China’s share of the global output will continue to rise for at least a decade, the gross domestic product will eventually grow at a far less muscular pace that resembles the US or Europe — not the China of the 1990s or early 2000s.
Stumbles, and even recessions, will become more frequent. Some of this is just a natural part of growing up. The real surprise may be that it has taken this long to realize.
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