Analysts suggest that simply cutting interest rates may not be enough to invigorate China’s faltering economy, a notion underscored by a recent announcement from the People’s Bank of China (PBOC). On Tuesday, the PBOC unexpectedly revealed a set of rate reductions, which included adjustments to existing mortgage rates. While this action led to an uptick in Chinese stock market prices, experts argue that more substantial interventions, such as fiscal stimulus, are essential for a meaningful economic recovery.
Larry Hu, Macquarie’s chief economist for China, remarked, “This move could signal the beginning of the end of China’s longest deflationary streak since 1999.” However, he warned that these rate cuts must be complemented by significant fiscal investment, particularly in housing, to ensure sustainable growth. Analysts generally agree that persistently weak domestic demand poses a significant hurdle for the economy.
Although the stock market reacted positively, the bond market showed a more tempered response. Following the rate reductions, the yields on Chinese 10-year government bonds initially fell to a historic low of 2%, eventually stabilizing at 2.07%. In contrast, the yield on the U.S. 10-year Treasury is currently 3.74%, highlighting a notable disparity in economic perspectives between the two nations.
Edmund Goh, head of China fixed income at abrdn, indicated that without robust fiscal policy support, an increase in Chinese government bond yields is unlikely. He foresees that Beijing will need to adopt more vigorous fiscal policies to tackle the ongoing sluggish growth, even though the government has previously been hesitant regarding such actions.
Historically, Chinese bond yields have been higher than those in the United States, making them appealing investment options. However, since April 2022, U.S. yields have surpassed those of China, largely due to the Federal Reserve’s aggressive interest rate hikes. Even with the Federal Reserve beginning to relax its monetary approach, the yield gap between the U.S. and China continues to grow.
China’s economy saw a 5% expansion in the first half of 2024, but there are worries that full-year growth may not meet the government’s objectives unless additional fiscal actions are introduced. Industrial production has seen a slowdown, and retail sales have recorded only a modest year-on-year rise of 2% recently.
While certain fiscal measures have been taken, analysts contend that these efforts fall short. The Ministry of Finance is maintaining a cautious stance, having set a deficit target of 3% for 2024. A report from the China Finance 40 Forum (CF40), a well-regarded Chinese think tank, indicates that resolving a 1 trillion yuan shortfall is necessary to fulfill the government’s expenditure targets for the year.
Louis Kuijs, Chief Economist for APAC at S&P Global Ratings, noted that the recent U.S. rate cut brings some relief for China’s currency and export activities; however, the nation’s economic progress will still hinge on stronger fiscal strategies. “Bond issuance has been slow, and there are no signs of significant fiscal stimulus plans,” Kuijs emphasized.
PBOC Governor Pan Gongsheng acknowledged these challenges, stressing that the central bank is working with the Ministry of Finance to facilitate bond issuance and underscoring the necessity for increased fiscal support to drive considerable economic growth.
In the near term, experts anticipate that Chinese bond yields will likely remain around 2%. Haizhong Chang, executive director of Fitch (China) Bohua Credit Ratings, highlighted the importance of a coordinated approach between fiscal stimulus and monetary easing to effectively direct credit into the real economy.
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