China is the first noticeable crack in the COVID-19 recovery.
The only major economy to show any growth at all last year, the country is now taking steps to ease monetary policy — just when the Federal Reserve is beginning to lay the groundwork to taper asset purchases. A significant slowing of its expansion might give other commercial powers pause about the robustness of the global upswing, and a taste of how hard it may be to meaningfully withdraw stimulus.
Just this month, the People’s Bank of China cut its reserve requirement for most banks by half a percentage point. The move, which will unleash about 1 trillion Chinese yuan ($154 billion) of long-term liquidity, was flagged by Beijing earlier this week, but surprised economists with the speed of its arrival. Officials may be signaling that economic growth data for the second quarter, due for release next week, will be soft.
The shift by the PBOC is jarring because China spent months conveying the idea that it was comfortable trimming — not adding — support for the economy. With the worst of the pandemic shock seemingly behind them, policy makers could return to one of their principle worries before COVID-19 struck: bolstering financial stability and discouraging firms from taking on too much debt.
For all the concerns about market upheaval when the Fed eventually starts dialing back quantitative easing, it looked for a while Beijing had already started down that path. Friday’s reserve cut suggests China is the one pivoting — in a dovish, not hawkish, direction.
Beijing is giving central banks around the world a lesson in the tribulations that may afflict policy makers once the big post-COVID-19 bounce peters out. Growth in gross domestic product was always going to slow from the record 18.3% year-on-year that China clocked in the first three months of 2021.
But the possible extent of the country’s cooling, coupled with high commodity and factory-gate prices, has grabbed investors’ attention. Fears that China is leading a broad-based slowdown pushed stocks lower in Asia Friday and weighed on U.S. Treasury yields this week.
Even if China GDP manages to pull off a roughly 8% expansion in the second quarter, as economists predict, the underlying trends show cause for concern. It’s worth considering that the PBOC’s gear shift will be much less dramatic than the Fed’s.
While fiscal policy in China has buttressed growth, it has been nowhere near as generous as what came out of the U.S. If Beijing is having misgivings about withdrawing minimal stimulus, what does this portend for the Fed, European Central Bank, Bank of England and others?
Interest rate increases are years away. Just this week, the ECB unveiled a new strategy that will, in theory, make it easier to stay lower for longer. Beijing’s recalibration makes Frankfurt’s timing look smart.
Economists are divided as to whether China’s move represents a broad-based return to easing by China or a more modest adjustment. But it doesn’t have to be broad-based to be significant. The world’s second-most powerful central bank is revising its script. Fed officials will be reading it carefully.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.
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