On Monday, July 22, the People’s Bank of China lowered its benchmark lending rates and an important short-term policy rate.
The precise timing was a surprise although leaders at the recently concluded third plenum had flagged continuing problems in the real estate sector and soft consumer demand. This is a hugely important change in policy for the People’s Bank, which had recently shied away from cutting rates in an effort to prevent further erosion in the yuan versus the U.S. dollar, and to lower inflation caused by higher prices for imports. The move, I think, signals the hugh level of anxiety in the Beijing leadership at the economy’s refusal to respond to previous stimulus moves.
I’d also note how damaging this move is to China in terms of global economic politics. Last month’s G7 meeting of the world’s most significant economies ended with multipl expressions of concern about China’s use of subsidies and cheap money to flood global markets with goods at prices that less-subsidized Western companies could not match. The worry was so intense that the meeting included with threats to retaliate if China didn’t change its ways. The interest rate cut from the People’s Bank is a move from the classic Chinese playbook and a cheaper yuan will give China’s exports an advantage of exactly the sort that the G7 meeting had criticized.
My conclusion is that the Xi Jinping government is sufficiently worried about the potential unrest that might result from flagging domestic economic growth that it thinks that the damage from any international flak is the lesser evil.
Data last week showed the economy grew at a 4.7% annual rate in the second quarter, down from 5.3% in the first quarter, and below the government’s 5% target for the year.. The property crisis worsened in June, with a measure of new home prices in 70 cities falling 0.67%, according to the National Bureau of Statistics, a month after they fell 0.71%.
Missing the official growth target isn’t merely a statistical embarrassment. The Communist Party faces a potentially politically explosive high rate of unemployment among younger Chinese workers. The unemployment rate for younger workers aged 16 to 24 in China was 14.9% as of December 2023. Officially. The actual rate is almost certainly higher. Last year China’s National Bureau of Statistics introduced a new methodology for calculating unemployment that excludes students from the total. Before that change the rate was 21.3% in June 2023. The official overall urban unemployment rate in China as of December 2023 was 5.1%. Of course, this number too is almost useless since this calculation excludes migrant workers who have left their home villages of official residence to seek work in China’s cities.
Politically, the biggest problem in the young worker unemployment crisis is the large number of recent college graduates who can’t find work at all or at their anticipated wage level.
After the interest rate cuts, the yuan fell to a near-two-week low against the U.S. dollar and is down over 2.5% this year. A weaker yuan would boost exports but would increase the cost of imported commodities and increase inflation for domestic consumers.
It’s likely that this won’t be the last move from the People’s Bank or the rest of China’s government. Han Wenxiu, the deputy director who heads the Communist Party’s financial affairs, said at a news conference that China will “need to introduce and implement more robust and effective” stimulus measures, owing to a lack of demand and “divergence in the performance between regions, industries, and businesses.”
Stay tuned.
