China is consciously uncoupling from Western peers on rates. Its central bank has held lending benchmarks steady as global peers slash. Bad debts and capital flight risk make big fiscal and monetary moves more dangerous than in 2009. That is forcing the government to find less conventional channels for stimulus. It’s a delicate balancing act.
The People’s Bank of China’s relative immobility has surprised many economists. Faced with a worldwide recession, the US Federal Reserve has lowered its funds rate to a target range of 0 per cent to 0.25 per cent; other central banks have followed suit. Yet the PBOC hasn’t adjusted any of its guidance in response. The one-year loan prime rate remains at 4.05 per cent; the medium-term lending facility rate at 3.15 per cent. The spread between 10-year Chinese government bonds and US Treasuries is nearly two percentage points, its widest since 2015.
Instead the PBOC has focused on the liquidity side of the equation, reducing the amount of cash lenders must hold in reserve, and easing very short-term borrowing costs. The seven-day repo, China’s best indicator of short-term money conditions, has come down to 1.9 per cent, from 2.7 per cent in mid-January. But with demand tepid at home and plunging abroad, the issue is less the cost of credit than weak appetite for investment — and the risk of a mass migration into dollars.
Sources told Reuters China’s latest infrastructure stimulus package is 2.8 trillion yuan, or around $400 billion, roughly 3 per cent of GDP. That’s not quite enough to get excited about; most high-yielding projects have been built already thanks to the construction binge China went on during the global financial crisis. Building more bridges to nowhere will generate temporary employment for people laid off from hotels and restaurants and export factories, but it will also leave local governments even more burdened with debts they will struggle to repay.
The fiscal response includes slashing taxes; there may be direct handouts to individuals too. That will further impinge on government budgets. State-owned companies are being rallied to public service; Beijing has asked them to extend credit along their supply chains, while utilities are to waive bills for poor households. Like policymakers elsewhere, Chinese economic managers have little choice but to accept more debt on their balance sheet. They are, however, trying to minimise the damage. If domestic demand revives quickly, policymakers will look wise. If not, they may regret their conservatism.