It’s been a big week on the global monetary calendar: China turns on the stimulus spigot, the US takes a pause, Europe hikes, and Japan stays as dovish as ever. Meanwhile, oil demand is sticky and it’s boom time for LNG. Plus, Toyota’s strategic pivot and France’s push for tariffs on Chinese EVs.
While central banks worldwide have waged a rate-hiking campaign, China is now going in the opposite direction.
On Thursday, the People’s Bank of China cut its medium-term lending rate. That followed Tuesday’s surprise trim of its seven-day reverse repo rate. Economists expect the benchmark loan prime rate to be cut next week, too. And major state-owned banks just slashed deposit rates last week.
But the rate cuts alone are unlikely to juice private sector investment and consumption. Interest rates aren’t the problem; fragile consumer and business confidence are. Rate cuts won’t repair the damage that years of unpredictable policy changes has wrought. Beijing has convened urgent meetings with business leaders to seek ideas on how to revive the economy. Those same business executives have likely been deeply rattled by Beijing’s policy U-turns.
Plus, China faces the risk of a balance sheet recession. That’s when household and business assets collapse in value, forcing more saving, crimping investment and consumption, and throttling economic growth. Even low rates don’t incentivize borrowing. In fact, facing weaker returns, savers may become even more reluctant to spend. (Meanwhile, the yuan is tumbling as Chinese and global rates diverge. So much for de-dollarization, quipped one economist this week.)
Now, Beijing is ready to turn on the fiscal stimulus firehose too, according to the Wall Street Journal. Measures will likely include billions of dollars of spending on infrastructure projects, and looser rules on real estate investments. But the property market is only a symptom of China’s deeper economic problems. And infrastructure buildouts will mean still more overcapacity, with low returns on investment and more distortions to global trade dynamics.