The recent news from China is that PBOC decided to fight the general malaise the Chinese economy has been experiencing but slashing again rates. Is this enough to jump start the world’s second largest economy? It’s certainty a move in the right direction. But is it enough? Spoiler — No.
The PBOC reduced interest rates by 25 bps and the reserve-requirement ratio by another 50 bps. This is the sixth time since November that central bank has slashed interest rates and fourth time to cut the RRR in order to allow banks to lend more and thus increase liquidity, which should prompt households and businesses (but mostly businesses) to borrow. Since the Chinese economic growth still heavily relies on investment and less from consumption, this move is likely to mostly behoove businesses rather than households.
Following this action, the lending rate and deposit rates will fall to 4.35% and 1.5%, respectively.
The Chinese economy is still likely to face harsh times as the Chinese RMB, which is linked to the U.S. dollar, is likely to resume its upward trend as other central banks aim to devalue their local currencies. Just yesterday ECB’s Draghi “released the doves” with a dovish statement that included heavy hints on additional rate cuts and bigger QE programs.
Even though the volatility in the Chinese equities and bonds market has subsided from the high levels it reached back in previous months, the volatility remains high. But as the PBOC tries to boost the growth of the Chinese economy, perhaps this news will also help reduce market volatility and improve confidence.
In terms of inflation, China still has, as best as we know, low inflation of below 2% along with a slower growth in the M2 – another indication that the inflation isn’t growing any faster.
So where does it leave China?
The economy isn’t going anywhere without the monetary support of PBOC especially as other central banks, expect for the FOMC, are aiming to depreciate their currencies. The bank is likely to keep slowly reducing rates, but it won’t likely be enough unless it will have fiscal support or if the private sector steps up to the plate or if more investments were to arrive from aboard. Of these three possibilities, it’s more likely that the former is the more plausible, but whether it will come to fruition is a whole different story.
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