On Tuesday, China’s central bank acted again to keep the Chinese economy from getting worse. Recall that in July, it had cut a swathe of rates. Its latest stimulus package includes a 20-basis-points cut in its 7-day reverse repo rate to 1.5%, as well as a reduction in the reserves that banks must hold.
Mortgage rates have been eased, which may help stabilize a wobbly market for property that’s yet to recover from its pandemic crash. Separately, a window for stock brokers and asset funds to access central bank money is expected to support equity values.
But the economy’s growth slump, with this year’s 5% GDP expansion target looking elusive, means policymakers have more than softening assets to worry about. With people’s pay under pressure, sagging retail prices mean deflation haunts China.
Falling prices can make people sit on money, reducing overall demand, setting off a downward spiral and hurting business prospects. As Japan found, real lending rates going high can be a dampener that’s hard to lift.
Monetary easing can restore stability if done in time. Dodgy Chinese data, though, adds a big dose of uncertainty to the effect this week’s action will have. That’s unfortunate.
