Growth Dragons Weekly: China is doing a "Beautiful Deleveraging"
In Growth Dragons this week:
China Cut Rates: Boost Liquidity To Stimulate Growth But Risk RMB and Capital Outflow
Is Halting Youth Jobless Data The Right Thing To Do?
Who’s Buying And Selling China Stocks
China Has A Say In Mergers Now: Blocking Intel’s Acquisition
Tencent 2Q23 Result Highlights
China Cut Rates: Boost Liquidity To Stimulate Growth But Risk RMB and Capital Outflow
The People's Bank of China (PBOC) has announced a reduction in the rate of one-year medium-term lending facility (MLF) loans for certain financial institutions. The rate has been lowered by 15 basis points, now standing at 2.50% compared to its previous level of 2.65%. Concurrently, yields on China's 10-year government bonds have eased to 2.56%, marking the lowest point since May 2020.
Unlike the majority of the world which has predominantly raised interest rates, China stands as an exception by opting to lower its rates. This is possible due to China's current absence of inflation and the necessity to provide economic stimulus. This decision holds significant ramifications.
Firstly, it has led to a wider disparity in yield between China (cut rates) and the United States (hike rates.) Consequently, investments in the U.S. appear more appealing to investors, which might trigger a notable outflow of funds from China. The immediate recovery of Chinese stocks seems uncertain, as rate cuts will take a longer time to show its effect through stronger corporate earnings and economic growth.
Another consequence is the downward pressure placed upon the Chinese Yuan (RMB). The RMB has reached a 13-year low against the USD. This aligns with our earlier discussions; reduced rates make investments in China less enticing, thereby diminishing the demand for RMB. But at the same time, a cheaper Yuan would boost exports.
In sum, these disruptions are transient in nature, as the goal is to stimulate the economy and to provide enough liquidity buffer for the beleaguered property sector. The pain of short-term capital exodus and weakening RMB are byproducts of the rate cut. Yet, the Chinese Government must delicately manage this situation to avert an abrupt devaluation of the currency.
Is Halting Youth Jobless Data The Right Thing To Do?
China is often singled out for criticism regarding data transparency, with concerns raised over inadequate disclosure. The situation becomes more problematic when China chooses to halt the reporting of data related to youth unemployment—an economic indicator closely monitored by Western media lately. This decision can foster the perception that China is withholding information to evade scrutiny, thereby causing heightened resentment from the Western world.
However, why is there not a similar focus on countries like Spain and Sweden, where youth employment rates stand at 27% and 25% respectively? Or even India’s 46%? Because most countries don’t matter as much as China on the global stage and the West wants to undermine China’s rise.
The way China defines unemployed youth is broad, encompassing scenarios such as a student who is not seeking a job but retaking exams. Numerous such ambiguous situations underscore the need for refinement in youth unemployment definitions. Yet, it remains uncertain if discontinuing reporting altogether is a constructive approach.