Editor’s Note: The most massive producer subsidy program in world history keeps chugging along as China drenches the production sector with another $115B in newly minted renminbi plus forced lending requirements.
The country’s central bank will in effect inject $115 billion into the financial system despite signs the economy has been improving.
[Carlos Tejada and
China’s central bank, the People’s Bank of China, announced that it would inject about $115 billion into the economy by freeing up banks to lend more money. The move comes after a similar action in September.
The change, announced on the New Year’s Day holiday, is likely to focus renewed attention on the health of the Chinese economy, a major driver of global growth. The move is relatively modest given the vast size of the Chinese economy, but the timing suggests that the country’s leaders are on high alert for new evidence of a slowdown. It follows a recent meeting of the country’s top economic planners and comes just weeks before Beijing releases closely watched estimates of year-end growth.
China’s leaders are contending with the country’s slowest pace of growth in nearly three decades.
The country’s slowdown has sent ripples through the global economy. Germany narrowly avoided a recession last fall, and its manufacturing sector has slumped in part because of reduced demand from China. Other European countries have also seen growth slow and their industrial sectors contract.
China’s struggles have spread to much of the rest of Asia, where it is the dominant economy, and also to Africa and Latin America, which have become increasingly reliant on Chinese investment. Australia, which has experienced a prolonged boom driven by Chinese demand for its natural resources, is now seeing its growth streak threatened.
American manufacturers, too, have struggled in the face of cooling global demand, which has exacerbated the falloff in trade brought on by President Trump’s various trade disputes. That could have political implications: The slowdown has been particularly acute in Midwestern swing states, which depend heavily on manufacturing and agriculture.
Other major central banks have also taken steps to shore up their economies. A few months ago, the European Central Bank announced its own stimulus package, totaling 20 billion euros per month, or nearly $25 billion at current exchange rates. In the United States, the Federal Reserve cut interest ratesthree times last year to prevent the manufacturing slowdown from spreading to the rest of the economy. Dozens of other central banks around the world have taken similar steps.
Jerome Powell, the Fed chair, said in March that there had been “a synchronized slowdown in economic activity around the globe” that was having an effect in the United States.
China’s latest stimulus effort comes in the form of a cut to the so-called reserve requirement ratio, the amount of money that commercial banks are required to stash away for a rainy day. The cut, which was expected by many economists and will take effect Monday, will effectively allow banks to lend an additional 800 billion yuan, or about $115 billion.
Beijing has been trying to pare down the country’s dependence on borrowing, which helped fuel heady growth in recent years but left big debts on the balance sheets of major corporations and local governments. Reducing that dependence could help prevent major problems down the road, but at the cost of slower growth in the near term.
Some recent signs had suggested that China’s slowdown was easing. November figures for industrial output and retail sales had indicated the economy was strengthening. The property market, an essential part of the Chinese economy that in recent months had been holding back growth, also appeared to be improving.
Other economies, too, have shown signs of stabilization in recent weeks. The European Central Bank held rates steady last month in a vote of confidence that further stimulus was unnecessary. In the United States, recession fears have eased since reaching a fever pitch last summer.
But other signs still indicate weakness. The China Beige Book, an economic consulting firm, pointed in its December report to slowing growth in new orders and ramped up borrowing by Chinese companies. “With China’s economy seeing record levels of corporate borrowing,” it said, “is this as good as it gets?”
The Chinese economy has also been hit by Mr. Trump’s trade war. Higher tariffs have made it more expensive to sell Chinese-made goods to American customers, denting China’s factory activity and consumer confidence there. A likely trade truce could limit the damage but still leave many tariffs in place.
In the cut announced Wednesday, economists see Beijing as trying to find middle ground between supporting economic growth without resorting to more aggressive steps that could rev the economy further but saddle the country with even more debt.
As a result, China’s headline growth figures are widely expected to slow further, though at a measured pace. In the first three quarters of 2019, its output grew 6.2 percent compared with a year before. Still, economists take those figures with a deep amount of skepticism because they tend to be smoother and steadier than those issued by other countries, and they usually hit official targets.
The cut is not unusual so early in the year ahead of China’s Lunar New Year holiday, which begins this year on Jan. 25, and when demand for cash intensifies. The central bank made a similar cut about a year ago.
China’s most recent cut reduced the requirement ratio by 0.5 percentage points, to 12.5 percent for large banks.