China has slashed a benchmark interest rate in response to mounting economic woes in yet another sign that Beijing is concerned about its country’s trajectory.
The cut was more modest than many forecasters had projected, although nonetheless, the People’s Bank of China reduced its one-year loan prime rate by a tenth of a percentage point to 3.45%. Meanwhile, its five-year rate was held steady at 4.2%.
MORTGAGE RATES AT TWO-DECADE HIGH COULD RISE FURTHER AND STAY THERE FOR MONTHS
Most economists had expected the Chinese central bank to cut both rates.
China’s currency, the yuan, has been slipping since last year. That means China has less room to ease its monetary policy, which might be why officials opted for the single rate cut this time.
“Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan,” Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management, told Reuters. “Chinese authorities care about currency market stability.”
The latest move comes just days after Beijing made an unexpected cut to its medium-term policy rate.
Cutting rates is a move that is designed to heat up demand. Rate cuts can cause inflation to rise in some circumstances. Inflation has been plaguing Western countries, including the United States, over the past couple of years.
The easing of China’s monetary policy runs in contrast to the U.S. and other Western countries, which have been raising interest rates and tightening monetary policy in response to too-high inflation after ultra-loose pandemic-era monetary policy.
China’s economic recovery following the pandemic has been underperforming, and the country is grappling with several macroeconomic challenges.
After slowing for several months, consumer prices in China actually fell by 0.3% in July, a situation known as deflation, which shows the Chinese economy is flagging as demand falls. Additionally, GDP growth is slowing and is expected to slow after years of breakneck growth, something that has broad economic implications beyond Asia.
The country is also facing a property crisis, with massive property developer China Evergrande Group filing for bankruptcy protection last Thursday.
Last week, China announced it would suspend publication of the youth unemployment rate. The excuse was that it needed to be better calculated, although it is noteworthy that youth unemployment has risen to new highs in recent months, another sign that China’s economy is on a bad trajectory.
The unemployment rate for Chinese 16- to 24-year-olds in urban areas is now over 21%. That is more than double what it was just a few years ago.
The suspended data publication could be an indication that Beijing is trying to obscure just how bad the country’s economic situation is, although a spokesman for the country’s statistics bureau said on Tuesday that two-thirds of those who fall into the youth bucket are students, so the government is working to get a more accurate calculation of youth unemployment.
While the economic slowdown in China has big implications for Beijing, it also could affect the U.S. economy and other Western countries because of how globalized the world is economically.
The U.S. agriculture and energy sectors could be affected by slowing demand in China. That is because China is the world’s largest importer and consumer of U.S. agricultural products. China also buys a large volume of energy products from the U.S.
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If demand falls off in China, U.S. energy and agricultural producers will feel the effects — something that could end up causing lost jobs here domestically, according to Scheherazade Rehman, a professor of international finance at George Washington University.
“We are so intrinsically entwined with this economy that we will hurt ourselves. We will disrupt all our existing supply chains, which is pretty significant,” Rehman recently told the Washington Examiner. “We will exacerbate delays in production. … It will force companies and consumers to pay more and not least because reallocation of production can’t happen overnight in the United States.”