PBOC Surprise Suggests China’s Prospects Are Truly Dire
The PBOC cut a key rate on Monday, a surprise to economists and the first cut since January. The reduction in the one-year contract loan rate was modest by standards for global borrowing cost adjustments – 10 basis points – but it was shocking because the central bank had seemed significantly less dovish of late. A few days earlier, officials seemed to steer investors away from the idea that rate cuts might come to the rescue. The emerging danger was inflation; still modest compared to the United States and Europe, but nonetheless recovering.
It’s not that China’s recovery, which has gone from global fighter to disappointment, doesn’t need help. Credit growth tumbled last month, hurt by housing market difficulties and sluggish business and consumer demand. Less than an hour after the rate cut, reports showed that industrial production was below estimates, retail sales rose less than expected and investment slowed. Youth unemployment is at an all time high and approaching 20%. The pessimistic data makes the government’s annual growth target of “about 5.5%” even more exaggerated.
The PBOC needs to do a lot better when it comes to communications. It’s a basic requirement for the monetary authority of the world’s second largest economy – and one with aspirations of global leadership. The bank’s quarterly monetary policy report, released on Wednesday, pledged to avoid massive stimulus and excessive money printing. Consumer prices rose 2.7% in July from a year earlier, the highest in two years. Inflation could exceed 3% this year, according to the authorities. “We cannot let our guard down easily,” the report said.
While the PBOC may have tried to push back on massive stimulus expectations, there are clearly 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, policymakers will hardly refuse. In addition, the economy will likely need more monetary assistance. Continued Covid-19 outbreaks and Beijing’s preference for lockdowns will dampen any significant recovery in growth.
With some sympathy for PBOC Governor Yi Gang, it should be noted that the Federal Reserve and the European Central Bank – considered the gold standard of autonomy – also suffered embarrassing communication stumbles the last year. While the Fed and ECB have risen, Beijing’s cut will reinforce the narrative that key global economic drivers are moving in fundamentally different policy directions. Neither encourages the idea that the world can avoid another recession.
China both contributes to and is a victim of a failing global economy. When the International Monetary Fund cut its forecast last month and warned of the prospect of another global recession, one of the most significant revisions concerned China. In recent decades, we’ve become more accustomed to China being a source of resilience when other powers like the United States, Europe, and Japan falter. It’s no longer the case now. Such weaker growth in major economies reduces demand for Chinese-made products, compounding the problem.
Don’t think the PBOC is over yet. Better to watch what the bank does, at least as much as what it says. More from Bloomberg Opinion:
• Let’s not mince words as the economy heads south: Daniel Moss
• China’s mortgage boycott brings back strange memories: Shuli Ren
• China’s demographics are an economic time bomb: Niall Ferguson
(Added a growth target in the third paragraph. An earlier version corrected the report’s time frame and publication date.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
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