In China’s World, Growth Worries Trump Inflation Fears

(Bloomberg Opinion) -- Talk about decoupling. The world's two largest economies are greeting the approaching second anniversary of the pandemic very differently. China's central bank is trying to combat a slowdown while the Federal Reserve is fretting about inflation and signaling a hastier withdrawal from stimulus. It’s too early to tell which course will be right, but the hurdles to growth sure seem daunting.

The People's Bank of China said late Monday it will lower the amount of cash most banks are required to hold in reserve by 0.5 percentage point, releasing 1.2 trillion yuan ($188 billion) of liquidity. The trim is the second this year and was foreshadowed by Premier Li Keqiang, who recently warned of downside risks to China's growth, which slackened last quarter. The PBOC’s step is unlikely to be the last: Bloomberg Economics' David Qu anticipates another 50-100 basis points in cuts next year.

That the reduction was expected does nothing to diminish its symbolism. Almost two years into Covid-19, Beijing is struggling with high factory gate prices, a bump in consumer inflation and an underwhelming expansion. A year ago, people marveled at China's bounce from the pandemic-induced slump; the 18.3% increase in gross domestic product during the first quarter was a record. China's exports are powering ahead, but not turbocharging the broader economy. A faltering property market has put the brakes on the recovery, with developer China Evergrande Group suffering a cash crunch that's reverberating through the property sector.

For its part, the Fed may see in the new year with a faster taper of asset purchases. Chair Jerome Powell indicated last week that a quicker exit from quantitative easing may be outlined as soon as this month. While the Fed has been at pains to draw a distinction between ending QE and starting hikes in the benchmark rate, many economists see multiple increases in the federal funds rate next year. For all the chatter in the past decade about China’s all-conquering growth eclipsing the U.S., when it comes to the monetary arena, the latter appears to have determined that the inflation fight must now take precedence. Beijing is prioritizing its sagging expansion.

China isn’t about to go wild and crazy with stimulus. It still worries about a build-up of debt (Evergrande shows just how much can go wrong). The PBOC said in its statement Monday that policy will remain prudent and that it won't flood the economy with cash. “Prudent” has been in its vocabulary so long that the recently retired Fed buzzword “transitory” look fresh by comparison. China still appears reluctant to embrace the need for an all-out assault on the slowdown — at least, in its rhetoric.

Great commercial power divergence isn't a new idea, given tariffs and technological competition. But the monetary landscape appeared more nuanced; Powell and PBOC Governor Yi Gang rarely took each other on publicly. The alternate roads suggest a bifurcation in the price of money as well. “As economic activity continues to weaken and the PBOC becomes more serious about lowering corporate financing costs we expect further action, including policy rate cuts,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note. 

Perhaps the PBOC's efforts to pose as a latter-day Bundesbank, the German central bank famed in the pre-euro era for hard money predilections, were the giveaway. A few months ago, Yi critiqued the quantitative easing pursued by Western central banks and positioned the PBOC as a paragon of rectitude. Better to watch what China does, not what it says.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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