Xi’s Keeping His Powder Dry While Trump Splurges on Stimulus
The world’s two biggest economies are taking very divergent paths on how to fight the slump triggered by the coronavirus.
(Bloomberg) -- The world’s two biggest economies are taking very divergent paths on how to fight the slump triggered by the coronavirus.
The People’s Bank of China has injected money into the financial system but held off from steep interest rate cuts. The government is accelerating spending on infrastructure and has lowered taxes but has come nowhere close to the 4 trillion yuan ($570 billion) bazooka-style stimulus it unleashed during the financial crisis.
China’s cautious approach contrasts with America’s, where the Federal Reserve has unleashed massive monetary support and President Donald Trump is pushing for a $1.2 trillion fiscal stimulus.
In Beijing, the government is claiming credit for leading the campaign against the virus, although a clear policy on how it intends to meet its economic targets this year is yet to be spelled out. In a U.S. election year, the prospect of a cratering domestic economy and panicked markets is a pressing concern in the White House as infection rates rise.
“The contrast with the U.S. policy response is striking,” said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings. “Few people would have expected, a month ago, that the Federal Reserve would cut its policy rate 15 times more than the PBOC.”
That refers to the 150 basis point reduction in the Federal Funds rate this month, versus the 10 basis points cut in the rate for China’s 1-year medium term lending facility. The two instruments aren’t exactly equivalent, but the latter is seen as the PBOC’s main policy instrument for now as it overhauls its interest-rate framework.
Debt Concerns
This week New Zealand and South Korea became the latest in the region to slash the cost of borrowing, while Japan stepped up purchases of exchange-traded funds.
The PBOC stance indicates ongoing concern about debt, given that the nation’s total debt load is almost three times the size of the economy. The central bank is also watching inflationary pressures caused by rising food prices, and may be holding fire for the second quarter when waning global demand will hit China.
On Wednesday, President Xi Jinping said that pressure on the economy is increasing as the virus spreads, and that policy will be adjusted as needed, in comments at a Politburo meeting carried by state media.
The Chinese central bank has so far maintained the steady approach by cutting rates on its medium-term loans and guiding down the closely-linked Loan Prime Rate, which is the basis for new lending. The LPR is expected by economists to drop further on Friday when it’s announced but officials have so far kept the benchmark deposit rate unchanged.
What Bloomberg’s Economists Say...
“The Federal Reserve’s aggressive rate cuts have given the PBOC more room to ease, although we don’t think this will be a direct factor as policy makers consider their next move. But banks may take the Fed’s cuts into account when submitting their quotation rate for the one-year LPR.”
-- David Qu, economist
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That approach still appears to be having modest success, with the weighted average interest rate for ordinary loans dropping to 5.49% in February from 5.74% in December.
Compare that to the Federal Reserve which continues to unleash emergency measures to flood the financial system with liquidity. They have also cut interest rates to near zero.
China’s fiscal approach is also more restrained. Local authorities are being allowed to sell special bonds to pay for infrastructure investment, and there’s been a push to sell these earlier in the year. There have also been targeted cuts to taxes and social security premiums for virus-hit companies to avoid massive layoffs.
Worse Than 2008
That’s as U.S. Treasury Secretary Steven Mnuchin warned the virus fallout could be worse than the 2008 financial crisis, Bloomberg News reported, and called for a package of more than $1 trillion that would include direct payments to everyday Americans.
“China’s priority now is to resume industrial production and stabilize demand, while the U.S. has to address a liquidity crunch first to stop market fallout,” said Nie Wen, an economist at Huabao Trust Co. in Shanghai. “In the longer term, however, both economies will have to face the same challenges ranging from declining demand to falling prices.”
The PBOC offered 1.2 trillion yuan of funding to the financial system on the first day after the extended Lunar New Year holidays and cut interest rates of its short-term loans to the money market on the following day. While the net injection wasn’t large as more than a trillion yuan of funding matured at the time, it was an unusual move as the central bank usually drains liquidity after the break. The key 7-day repo rate for money markets has dropped to 1.7% from 2.8% at the beginning of the year.
China’s disciplined approach is being tested on a daily basis as economists continue to downgrade their outlook for growth. Economists now forecast that in the first quarter, the economy will contract by 6% from a year earlier, according to estimates released after data this week showed a historic slump in economic activity in the first two months.
This isn’t great news for the rest of the world given that China is the second-largest economy and accounts for over 30% of global growth. How quickly it can recover will influence how quickly the world can recover.
While the government in Beijing is still wary of the hangover left by the huge stimulus unleashed in the global financial crisis, they will still want the economy to motor, said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group.
“China’s policymakers are still eager to impress the world with a decent economic performance in 2020,” he said.
©2020 Bloomberg L.P.
With assistance from Bloomberg
