Following on Sunday evening's "China’s central bank cuts key policy rate in surprise move".
From Bloomberg Opinion, July 22:
The central bank’s response to a sluggish economy looks almost grudging. Further assistance awaits Fed action.
In finally trimming a key interest rate, China did the bare minimum to display attentiveness to sluggish growth and anemic levels of inflation. This is far from a major shot in the arm for the economy. That may await cuts by the Federal Reserve, an uncomfortable degree of dependence on the nation’s biggest rival.
The action by the People's Bank of China is the surprise that almost doesn’t fit the description. True, few economists predicted the step on Monday. But the case for markedly easing borrowing costs, not merely nudging them a tad lower, has been compelling for a while. The reduction of 10 basis points in the seven-day repurchase rate, followed quickly by similar steps from commercial lenders, looks grudging. The best that can be said is that, coming after a major Communist Party gathering, the move suggests at least some desire to shore up growth.
By the standards of other major economies, China isn’t doing terribly: Gross domestic product expanded 4.7% in the second quarter from a year earlier, less than anticipated but far from a disaster. Exports have cranked up. Inflation certainly hasn’t been a concern for PBOC Governor Pan Gongsheng in the way it has bothered Fed Chair Jerome Powell or European Central Bank President Christine Lagarde.
By past standards of China's economy, and expectations for a post-Covid resurgence, however, the performance is disappointing. The growth surge after reopening evaporated quickly and the pace of price increases has struggled to stay above zero. Factory-gate prices are falling. Deflation stalks China, an unenviable position that would ordinarily require — and receive — a muscular remedy.
The scale of the monetary response has been underwhelming. After all, the specter of deflation was one of the big factors that pushed former ECB chief Mario Draghi to utter one of the most memorable phrases in modern economic history: “Whatever it takes.” (Draghi was also trying to extinguish a debt crisis within the euro zone.)...
....MUCH MORE
Related at Bloomberg, July 21:
China Bond Yields Test PBOC Intervention Zone After Surprise Cut
One of the reasons China has to be cautious about rate moves is the very real risk of capital flight. A slow-motion devaluation of the yuan has a couple negative effects: 1) Converting your currency into jade or whatever and sending it off to Uncle Liu in Tibet starts to look more attractive despite the risks and 2) A weaker yuan makes it much more expensive to purchase dollars to service and repay dollar-denominated debts.
At one time those debts, both corporate and various levels of governmental were estimated at $3 trillion* meaning a 10% depreciation adds $300 billion to the eventual cost.
Here's five years of USDCNY via TradingView. Up is weaker i.e. more yuan to buy a buck:
China’s Achilles’ heel—capital flight
*If interested see:
This is an old warning, November 16, 2018, but very important for an understanding of the high wire act the PBOC and the Government/Communist Party are embarked on.
From the South China Morning Post, back before the CCP's crackdown on Hong Kong forced the SCMP to toe the party line....
