Growth Dragons Weekly: Not Just You, China is Waiting For a US Rate Cut Too
What happened in China this week:
Not Just You, China is Waiting For a US Rate Cut Too
You Tax My Cars, I Check Your Pork
GMV in 618 Shopping Festival Down 7% YoY
Tencent Restricts AI Livestreaming While Competitors Embrace It, and It Pulled a Top-Selling Game. Why?
Do You Still Drink Vitasoy?
#1 Not Just You, China is Waiting For a US Rate Cut Too
China left its benchmark lending rate unchanged on Thursday. The one-year loan prime rate was kept at 3.45%, and the five-year loan prime rate was held at 3.95%. China has been lowering interest rates to stimulate its economy, while most of the world's economies have been hiking rates in recent years. However, these rate cuts have been gradual to avoid causing the Yuan to weaken too quickly, which could encourage capital outflow, thereby depleting the much-needed capital to support its economic growth and stock market.
The Yuan has indeed been weakening, moving from 6.90 Yuan per USD in 2022 to around 7.25 Yuan per USD currently. The China Central Bank has fixed its Yuan stronger at around 7.10, allowing only a gradual weakening of the fixing.
This indicates that China is trying to balance its economic policies—cutting interest rates to stimulate the economy while fixing the Yuan stronger to prevent rapid depreciation. A weakening Yuan would make USD-denominated loans more expensive to repay, potentially causing more issues for borrowers and exacerbating the property crisis. On the other hand, a cheaper Yuan aids exports, and China saw an 8.6% year-on-year growth in total imports and exports in May, achieving a 586.4 billion Yuan surplus. However, western countries are now less welcoming of Chinese imports, as evident through several tariffs. Thus, the situation could worsen if the Yuan weakens significantly. As a result of this balancing act, China’s recovery has been modest, often failing to meet the world's higher expectations.
China Central Bank governor, Pan Gongsheng, signaled that there is more room to ease monetary policy as other economies, like the US, are pivoting towards cutting rates this year. This will close the interest rate differential between China and the US, providing relief for the weakening Yuan and giving China more room to maneuver.