China has already begun a Round 2 of such monetary measures, reducing interest rates just days after announcing upcoming trade negotiations in Switzerland. This shift in direction is significant as the country loses no time in trying to accelerate the nation’s economic recovery and re-establish investor confidence. Analysts suggest that these actions may be more of a desperate attempt to stabilize the economy rather than a comprehensive strategy for recovery.
In the wake of trade talk thaw, China settled its own markets, pouring 1 trillion yuan into its financial sector. This important increase in liquidity is aimed at the sectors prioritized by the Prime Minister, such as eldercare, technology, and small-and-medium-sized enterprises (SMEs). Even with this aggressive approach, experts are doubtful that these measures will be effective. Alternatively, some economists say that the real economy just isn’t looking for credit right now. Instead, it still wrestles with a confidence crisis, deteriorating property market and falling export values.
The PBOC has cut the 7-day reverse repo rate to 1.4%. Some observers have interpreted this move as an indication that the agency is desperate rather than as the outcome of long-term strategy and planning. New central bank governor Pan Gongsheng has sought to portray the cut in rates as structural support to the economy. Yet most analysts view this as a thin veneer of leverage layered on top of more profound economic stress.
And that’s why China’s stock market has proven to be surprisingly resilient, with stocks largely still being bid up. Sadly, there is no evidence of any kind of mighty rally or “moonshot” anywhere on the horizon. The offshore yuan was under similar downward pressure, floating down toward 7.22 against the dollar. This depreciation is indicative of larger fears about the state of China’s economy and investor confidence.
Structural tools now account for 13% of the PBOC’s balance sheet. This move is both a reflection and an illustration of the increasing dependence on untested monetary policy tools. These tools are meant to deliver place-based, targeted support, but they don’t begin to solve the systemic problems that have long undergirded our economy. The recent actions have led to speculation that China is merely “throwing liquidity at the wall, hoping something sticks.”
The rapid interest rate cuts and accompanying liquidity injections are immediate triage steps. Their goal is to keep a sinking economy from going under, not balanced, nuanced policy designs meant to foster sustainable economic expansion. Yet the combination of weak consumer confidence and an increasingly uncertain global trade environment continues to weigh heavily on China’s economic outlook.