China has given countries like Australia a lot to ponder with its latest monetary policy easing.
While the Reserve Bank here obsesses over inflation and uses a blunderbuss approach, in the form of high interest rates, to try to control it, China faces an entirely different set of pressures that are far more worrisome, pernicious, and deflationary—always more dangerous than inflation.
Since China sustains much of our economy through its massive purchases of coal, iron ore, gas, and other commodities, these policy moves hold significant importance. Many analysts still believe, however, that they fall short of offering truly decisive support for China’s weakening economy.
Unlike the rate cut from the Fed (and in Hong Kong, where the currency is linked to the US dollar and Fed moves), China’s interest rates are already at record lows, and further cuts will push them into uncharted territory, confirming that the economy is stagnating.
This was confirmed by economic data for August, which showed the Chinese economy edging towards another bout of deflation, alongside an ever-growing black hole in property, record levels of youth unemployment, weak consumer spending, and sluggish retail sales.
Not even a solid rise in exports can save the economy, as much of what is shipped overseas can't be sold in China and is being offloaded onto global markets to keep Chinese industry alive—steel and motor vehicles are prime examples. Imports remain weak, reflecting lacklustre domestic demand, even among exporters.
The government has struggled to develop a coherent set of policies to support the economy this year and has shied away from dramatic measures, such as a large stimulus package or a rate cut comparable to the Fed's recent 0.50% reduction.
It has only tinkered with the property sector's problems. The $US150 billion or more claimed to have been directed toward supporting this stricken sector has done little, as new home prices continue to slide, and investment, sales, and new construction continue to decline by over 20% per month. Millions of people are still waiting for their property purchases to be finalised.
After leaving its key lending rates unchanged in its monthly setting last Friday, the People’s Bank of China introduced another small easing on Monday, reducing the 14-day repurchase (repo) rate for major players in the country’s financial markets.
Then, on Tuesday morning, reports emerged of a possible further move by the central bank.
In a dramatic series of statements in Beijing that day, the People’s Bank of China announced a cut in a key market rate, hinted at further cuts to other key rates, and freed up billions more from bank asset reserves to stem the economic slump.
People’s Bank of China Governor Pan Gongsheng told a press conference on Tuesday that the Reserve Requirement Ratio (RRR) would be cut by 50 basis points (freeing up more than $US140 billion). The bank would also cut the 7-day repo rate by 0.2 percentage points, following a 0.1 percentage point cut in the 14-day rate on Monday.
He also indicated that there could be further cuts to the RRR by the end of the year, though he didn’t specify when the latest cut would take effect. That announcement is still pending.
Later in the press conference, Pan suggested that a 0.2-0.25% cut in the loan prime rate (LPR) is possible, though he did not clarify whether he was referring to the one-year or five-year LPR. Given that no changes were made during last Friday’s monthly setting, expectations are low, and observers will want to see an actual announcement before believing it.
Pan added that the official policy announcements would be published on the central bank’s website, but did not specify when. He has a history of making such announcements at rare press briefings. In January, during his first media event, he announced an RRR cut, which was later implemented.
China’s news sent the share prices of major miners higher: Rio Tinto was up 3%, BHP rose 2.1%, and Fortescue gained 1.3%.
However, this reaction may be premature, as the most significant moves will be cuts to major rates like the one-year and five-year LPR, and evidence of economic stabilisation—likely not expected until late 2024.
The Hang Seng in Hong Kong and the CSI 300 on the mainland both rose more than 3% in late afternoon trading—a rally driven by hope and speculation rather than by any concrete developments.
