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    Interest rate cuts indicate gloomy scenario in China

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    Just a few days earlier, officials appeared to lure investors away from the notion that rate cuts could be useful (Image: REUTERS/Carlos Garcia Rawlins)

    the fragile economy gives China demands a central bank lifeline, regardless of warnings that inflation has risen and needs to be contained.

    With stagnant growth and demand for credit in decline, the People’s Bank of China made it clear that recovery comes first.

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    Price increases can be worrisome, but they are a second-order problem – for now. Beijing must take into account the bleak scenario.

    The PBoC cut interest rates on Monday, a surprise to economists and the first cut since January.

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    The reduction in the benchmark rate for one-year loans was modest by global interest rate adjustment standards – 10 basis points – but shocking, as the central bank looked distinctly less dovish lately.

    Just a few days earlier, officials appeared to steer investors away from the notion that rate cuts might be helpful.

    The emerging danger was the inflation; still modest in relation to USA and the Europebut still gaining strength.

    It’s not that China’s recovery, from a worldwide success to a disappointing affair, couldn’t be helped.

    China
    It’s not that China’s recovery, which went from a global success to a disappointing affair, couldn’t be helped (Image: REUTERS/Tingshu Wang)

    Credit growth slumped last month, hampered by problems in the housing market and anemic demand from businesses and consumers.

    Less than an hour after the rate cut, reports showed that industrial production fell short of estimates, retail sales grew less than forecast and investment slowed.

    Youth unemployment is at a record high and approaching 20%. The weak data make the government’s annual growth target of “about 5.5%” even more exaggerated.

    The PBoC needs to improve communication. This is a basic requirement for the monetary authority of the world’s second largest economy – and with aspirations for world leadership.

    The bank’s quarterly monetary policy report, released on Wednesday, vowed to avoid large-scale stimulus and excessive money printing.

    Consumer prices rose 2.7% in July from a year earlier, the biggest gain in two years.

    Inflation could exceed 3% this year, the official projected. “We cannot easily let our guard down,” the report said.

    While the PBoC appears to be trying to resist expectations of mass stimulus, there are clear limits to resistance: unlike its counterparts in other major economies, the central bank is not independent of the government. If Communist Party leaders order further cuts, monetary authorities are unlikely to refuse. In addition, the economy is likely to need more assistance on the monetary front.

    Persistent outbreaks of Covid-19 and Beijing’s preference for lockdowns will put the brakes on any significant acceleration in growth.

    Asian Scholarships
    Consumer prices rose 2.7% in July from a year earlier, the biggest gain in two years (Image: Pixabay/glaborde7)

    With some sympathy for PBoC chairman Yi Gang, it is worth noting that the Federal Reserve it’s the European central bank – viewed as the gold standard of autonomy – have also suffered embarrassing communication blunders in the last year. While the Fed and ECB have both raised rates, Beijing’s rate cuts will strengthen the narrative that the world’s key economic engines are moving in fundamentally different policy directions.

    None of them encourage the view that the world can avoid a further downturn.

    China contributes and, at the same time, is a victim of an uncertain world economy. When the International Monetary Fund cut forecasts last month and warned of the prospect of a new global recession, one of the biggest revisions was to China.

    Over the past few decades, we’ve been more used to China being a source of resilience when other powers like the US, Europe and Japan wavered.

    Not the case now. This lower growth in major economies reduces demand for Chinese-made goods, compounding the challenge.

    Don’t think the PBoC is done. Better watch what the bank does, at least as much as what it says.

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    Source: Moneytimes

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