Analysts indicate that merely reducing interest rates may not suffice to stimulate recovery in China’s slowing economy, as highlighted by a recent statement from the People’s Bank of China (PBOC). On Tuesday, the PBOC unexpectedly announced a series of rate reductions, including one impacting existing mortgage rates. While this decision resulted in a spike in Chinese stock market values, experts contend that more assertive measures, such as fiscal stimulus, are crucial for a true economic resurgence.
Larry Hu, Macquarie’s chief economist for China, noted, “This move could signal the beginning of the end of China’s longest deflationary streak since 1999.” Nonetheless, he cautioned that such rate cuts need to be paired with substantial fiscal investment, especially in the housing sector, to foster sustainable growth. Analysts widely agree that ongoing weak domestic demand presents a considerable challenge to the economy.
Although the stock market showed a positive response, the bond market remained more restrained. Following the rate cuts, the yields on Chinese 10-year government bonds initially dipped to a record low of 2% before settling at 2.07%. Comparatively, the U.S. 10-year Treasury yield currently stands at 3.74%, emphasizing a significant difference in economic outlook between the two countries.
Edmund Goh, head of China fixed income at abrdn, stated that without strong fiscal policy support, a rise in Chinese government bond yields appears unlikely. He anticipates that Beijing will have to implement more aggressive fiscal measures in response to the persistent sluggish growth, despite the government’s previous reluctance concerning such initiatives.
Traditionally, Chinese bond yields have exceeded those of the U.S., making them attractive investment options. However, since April 2022, U.S. yields have overtaken those of China, primarily due to the Federal Reserve’s aggressive interest rate hikes. Even with the Fed beginning to loosen its monetary policy, the gap in yields between the U.S. and China continues to widen.
China’s economy expanded by 5% in the first half of 2024, yet there are concerns that full-year growth may fall short of the government’s target unless further fiscal measures are enacted. Industrial activity has slowed, and retail sales have experienced only a modest year-on-year increase of 2% lately.
While some fiscal initiatives have been implemented, analysts argue that these measures are insufficient. The Ministry of Finance has retained a cautious approach, setting a 3% deficit target for 2024. A report from the China Finance 40 Forum (CF40), a respected Chinese think tank, suggests that a 1 trillion yuan gap needs to be resolved to meet the government’s spending goals for the year.
Louis Kuijs, Chief Economist for APAC at S&P Global Ratings, remarked that the recent U.S. rate cut provides some relief for China’s currency and exports; however, the nation’s economic growth will still depend on more robust fiscal policies. “Bond issuance has been slow, and there are no signs of substantial fiscal stimulus plans,” Kuijs pointed out.
PBOC Governor Pan Gongsheng acknowledged these issues, emphasizing that the central bank is collaborating with the Ministry of Finance on bond issuance and highlighting the need for more extensive fiscal support to promote significant economic growth.
In the short term, experts predict that Chinese bond yields will likely hover around 2%. Haizhong Chang, executive director of Fitch (China) Bohua Credit Ratings, mentioned that a synergy between fiscal stimulus and monetary easing is vital for effectively channeling credit into the real economy.
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