Sino File | As trade war looms, the US looks confident. China, not so much
Divergence between the US Fed and the People’s Bank of China highlights how policymakers view their country’s economic outlook as the world’s two most important trading partners stumble towards a head-on confrontation
It has long been said that when the Fed sneezes, emerging markets catch a cold. And China, as the world’s largest developing economy and exporter, is no exception – its fate is closely linked to the US market. That is why China’s central bank usually mirrors the Federal Reserve’s monetary policy, tightening when it tightens, loosening when it loosens. For example, in March and December of 2017 and March this year, it followed rate hikes by the Fed with increases in its reverse repurchases rate – one of Beijing’s most commonly used tools to control liquidity in the financial system.
WATCH: The US-China trade war and its impact on consumers
But Beijing now appears ready to defy convention. When the Fed moved to tighten the monetary supply with its rate hike of 25 basis points on June 14, the People’s Bank of China went in the opposite direction and loosened the taps. Not only did it – quite unexpectedly – leave its reverse repo rate unchanged, but last Sunday it cut the reserve requirement ratio on its commercial banks by 50 basis points. That move, which will inject about 700 billion yuan into the economy, came on top of its 100 basis points cut in April, and is a clear sign of policy easing in the face of headwinds both domestically and from abroad.
China’s easing, on the other hand, highlights Beijing’s concern that economic growth is losing momentum and market fears regarding the trade row with Washington. While China’s economy may still achieve an enviable 6.5 per cent growth this year, warning lights are flashing in some areas. For decades, China’s phenomenal growth has been fuelled by three major drivers: capital investment, exports and private consumption.
But activity indicators in May suggested that investment, exports and retail sales had all unexpectedly slowed. Fixed asset investment growth slowed to 3.9 per cent year-on-year, the lowest in 18 months, with infrastructure investment declining 1.1 per cent. Export growth slowed to only 3.7 per cent in April and 3.2 per cent in May – and growth could be further limited by the trade dispute. Meanwhile, retail sales rose 8.5 per cent in May from a year earlier, the slowest pace since June 2003.
The situation for China’s economy will probably get worse before it gets better. The party-led and state-dominated economy is now clouded by a host of issues; overcapacity in some industries, an assets bubble, a problematic property market, a mounting debt burden and rising credit defaults. And a trade war with the US may be the biggest risk of all. Thus the divergence in monetary policies between the Fed and the People’s Bank reflects policymakers’ confidence in their country’s economic outlook as the world’s two most important trading partners stumble towards a confrontation. The US looks confident; China, not so much. ■