Analysts indicate that China’s decelerating economic growth may necessitate more than merely lowering interest rates for recovery, following a recent announcement from the People’s Bank of China (PBOC). On Tuesday, the PBOC unexpectedly unveiled several rate cuts, including one that impacts existing mortgage loans. Although this decision resulted in a spike in Chinese stock prices, experts assert that more aggressive measures, such as fiscal stimulus, are critical for a true economic revitalization.
Larry Hu, Macquarie’s chief economist for China, commented, “This move could signal the beginning of the end of China’s longest deflationary streak since 1999.” He cautioned, however, that these interest rate reductions should be matched with significant fiscal spending, especially in the housing sector, to secure durable growth. Analysts generally agree that persistently weak domestic demand continues to weigh heavily on the economy.
While the stock market responded positively, the bond market took a more guarded approach. Following the rate cuts, yields on Chinese 10-year government bonds initially dropped to a historic low of 2% before rebounding to 2.07%. In contrast, the yield on U.S. 10-year Treasury bonds stands at 3.74%, highlighting a significant contrast in economic forecasts between the two countries.
Edmund Goh, who heads China fixed income at abrdn, noted that without strong fiscal policy support, an increase in yields for Chinese government bonds appears unlikely. He anticipates that Beijing will be pressured to implement more aggressive fiscal stimulus in response to ongoing sluggish growth, despite the government’s previous reluctance to adopt such strategies.
Traditionally, Chinese bond yields have exceeded those of their U.S. counterparts, making them attractive investments. However, since April 2022, U.S. yields have overtaken those in China, primarily due to aggressive interest rate hikes by the U.S. Federal Reserve. Even with the Fed’s shift towards easing its monetary policy, the gap in yields between the U.S. and China continues to widen.
China’s economy recorded a growth rate of 5% in the first half of 2024, yet concerns linger that full-year growth may fall short of the government’s target unless additional fiscal stimulus is deployed. Industrial activities have slowed down, and retail sales have only seen a modest year-on-year rise of 2% in recent months.
While some fiscal initiatives have been introduced, analysts argue they are insufficient. The Ministry of Finance has adopted a cautious approach, aiming for a 3% deficit target for 2024. A report from the China Finance 40 Forum (CF40), a respected Chinese think tank, highlights a need to address a shortfall of 1 trillion yuan to meet the year’s spending objectives.
Louis Kuijs, Chief Economist for APAC at S&P Global Ratings, noted that the recent U.S. rate cut provides some relief for China’s currency and exports, yet the country’s economic growth will still rely on more forceful fiscal policies. “Bond issuance has been slow, and there are no indications of substantial fiscal stimulus plans,” Kuijs stated.
PBOC Governor Pan Gongsheng acknowledged these concerns, mentioning that the central bank is working closely with the Ministry of Finance on bond issuance and emphasizing the importance of more extensive fiscal support for achieving significant economic growth.
In the short term, experts predict that Chinese bond yields are likely to hover around 2%. Haizhong Chang, executive director at Fitch (China) Bohua Credit Ratings, explained that the interplay of fiscal stimulus and monetary easing is crucial for effectively directing credit into the real economy.
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