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China’s Rate-Cut Calls Rise

In China, calls for cutting interest rates are now becoming louder and louder, which are addressed to the central bank of this Asian country.

China’s Rate-Cut Calls Rise

It is worth noting that the lowering of the cost of borrowing over time began to have a kind of political connotation. The dynamic of the corresponding indicator has a direct impact on the state of affairs in the space of the economic system of a particular country. At the same time, the strength of the economy determines the level of well-being of society in a material sense. For this reason, lowering the cost of borrowing is a decision, the materialization of which is a factor impacting the political situation. The attitude of the population towards the government largely depends on the quality of life in the country, including in the financial plane. This thesis is justified from the point of view of the postulates of economic and political theory and also refers to a kind of dogma proven by practical experience.

Currently, the Chinese leadership is faced with a choice that cannot be called simple and which at the same time has no signs of complexity. In this case, the potential answers to the question will not form a dilemma. Currently, Beijing has to decide whether it should provide assistance to the economic system, which is on an uneven recovery trajectory, or take measures to prevent the implementation of the process of an even sharper decline in the exchange rate of China’s national currency.

The media conducted a survey on expectations and wishes regarding the upcoming decision of the central bank of the Asian country on the so-called medium-term lending facility rate. According to the results of this opinion survey, it was found that 21% of respondents predict that China’s financial regulator will decide on cutting the mentioned indicator. It is worth noting that in May, only 10% of interviewees expected the central bank of the Asian country to begin lowering the medium-term lending facility rate. Also, in this case, it is very noteworthy that in April there were no such forecasts at all regarding the likely actions of the People’s Bank of China.

The financial regulator of the Asian country is currently approaching the need to make difficult choices, the potential results of which are not unambiguous in terms of favorable and negative aspects of their consequences. In this case, the main problem lies in the fact that the main tool of the People’s Bank of China to raise interest rates to stimulate the process of economic growth may become a factor of adverse impact on the yuan. It is worth noting that since the beginning of the current year, the national currency of the Asian country has already fallen by 2% against the dollar.

Easing the monetary policy of the People’s Bank of China has become a more realistic scenario for the decisions and actions of the financial regulator against the background of lowering the cost of borrowing committed by the European Central Bank and the Bank of Canada. In the era of globalization of many processes, including economic ones, the level of interdependence of the steps of organizations and authorities in different parts of the world has significantly increased. This tendency is also relevant for central banks. At the same time, it is worth noting that in the context of the approach to changing the interest rate indicator, the position of the Federal Reserve System is of great importance. The financial regulator of the United States has so far been in no hurry to begin easing monetary policy, stating the need to form greater confidence that the dynamic of the inflationary process is confidently and unhindered approaching the target before lowering the cost of borrowing.

For the People’s Bank of China, cutting interest rates is an appropriate solution in terms of implementing efforts to stimulate domestic demand in the Asian country, which is currently insufficient to ensure intensive economic growth.

Jacqueline Rong, chief China economist at BNP Paribas SA, says that the current circumstances in the Asian country signal the need to ease monetary policy. According to the expert, factors such as low demand for credits, deflation, and extremely uneven economic growth are in favor of the appropriate decision. Jacqueline Rong expects the People’s Bank of China to cut the medium-term lending facility rate by 10 basis points in June.

The media also report that discussions are nowadays underway at the central bank of the Asian country, during which it is stated that it is currently extremely difficult, within the framework of practical actions and in the context of the current realities, to adhere to the wishes of the central government to maintain the yuan as a powerful currency and at the same time provide measures sufficient to recovery the world’s second-largest economy the prospects for a positive momentum of which are significantly complicated by the prolonged crisis in the real estate sector, which is beginning to demonstrate a kind of fundamental character.

At the same time, most participants in the above-mentioned survey assume that the medium-term lending facility rate will remain stable. In their opinion, the People’s Bank of China will continue to follow the current monetary policy strategy due to circumstances such as lingering pressure on the yuan and weak demand for medium-term loans.

Xiaojia Zhi, an economist at Credit Agricole CIB in Hong Kong, says that the Asian country’s financial regulator may not start cutting interest rates or the reserve requirement ratio in the foreseeable future due to its focus on foreign exchange rate stability. Also in this context, the expert noted that the domestic interbank liquidity condition appears ample at present.

It is worth noting that China’s economy is not on a downward trajectory and does not demonstrate what can be described as a negative dynamic. At the same time, the corresponding process is too uneven. Against this background, it is significantly more difficult to decide on monetary policy easing.

In May, Chinese exports grew by 7.6% year-on-year. Experts interviewed by the media predicted that this figure would increase by 5.7%. At the same time, consumer prices in China rose 0.3% year-on-year last month. Analysts interviewed by the media predicted that this figure would increase by 0.4%.

Also, the expert community is currently spreading the expectation that official data, which will be published next week, will show a slowdown in industrial output in China in May compared with the indicator for April. This forecast is because the holiday break has become a factor affecting the mentioned sphere of activity. At the same time, Chinese retail sales data for May is expected to show a 3% year-on-year increase in the corresponding indicator. It is worth noting that in April, the specified figure grew by 2.3% compared to the result for the same period in 2023.

The Chinese real estate sector continues to be in a crisis condition, which is confirmed by indicators of relevant financial activities. For example, investments in the mentioned sector in January-May 2024 fell by 10% compared to the same period last year.

Beijing has set a target for economic growth in 2024 at 5%. Most experts and analysts assume that this goal of the Chinese leadership will be achieved. For example, in May, the International Monetary Fund lifted the forecast for economic growth in the Asian country from 4.6% to 5%.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.