With the eurozone struggling, economic growth now depends on the United States.
China has announced new stimulus measures to revive its sluggish economy.
But with the eurozone struggling, global economic growth now depends on the United States.
In China, safety nets seem hard to find as policy easing has failed again.
China has announced a series of new stimulus measures to revive its sluggish economy, which has yet to regain momentum since it began reopening from strict “zero-COVID” lockdowns in the second half of 2022. China’s central bank, the People’s Bank of China (PBOC), has slashed interest rates, lowered reserve requirements for banks and boosted housing support.
China’s target seven-day reverse repo rate was cut to 1.5% from 1.7%, and the weighted average reserve ratio (RRR) of domestic banks fell to 6.6% from 7%. The People’s Bank of China also cut interest rates on existing mortgages by an average of 0.5% and reduced the down payment required for second home purchases to 15% from 25%.
The central bank also sought to boost the stock market. It said it would provide 500 billion yuan ($71 billion) in loans to help Chinese companies buy domestic shares, and it would set up a swap facility to provide nearly 800 billion yuan ($114 billion) of liquidity for securities firms, funds and insurance companies to help finance their stock purchases.
No Safety Net: Global Growth Depends on the US
These efforts come at a time when the global economy is struggling with new headwinds: Purchasing Managers’ Index (PMI) data released earlier this week showed mixed performances in the euro zone and the United States, two economies that, together with China, account for roughly 50% of global output and whose performance will determine the fate of the world.
S&P Global, CFLP, NBS
Data showed U.S. growth remained strong in September. The pace of expansion in economic activity jumped to its highest level in a year in May and has remained there for a fourth month, as resilience in the services sector offset a deepening slump in manufacturing.
Meanwhile, it was the euro zone’s second-worst performing month this year. The region’s economy contracted for the first time since February and at the fastest pace since January. Growth in the services sector slowed to a near halt while conditions in the manufacturing sector continued to deteriorate, reaching the worst level since December.
China’s economic recovery: too late, too little again
If China’s stimulus plan is successful, it would provide a vital safety net for a global economy now almost entirely dependent on demand from the U.S. Unfortunately, recent experience suggests that this new effort will likely be nothing more than a series of half-measures that will not deliver lasting results.
Domestic stocks naturally soared when the People’s Bank of China made the announcement, as they did when China instructed sovereign wealth funds to buy into the domestic market and then replaced the head of its securities regulator. But all those gains have been wiped out. Successive interest rate cuts since mid-2021 have not led to a recovery in lending.
NBS, Macro Micro
That’s because the economy is fundamentally lacking in demand. A survey of depositors by the People’s Bank of China found that saving future income was preferred by 58% over consumption (24.5%) and investment (17.5%). Household bank deposits reached a record 132 trillion yuan by the middle of this year.
China has ignored the example of Western countries, which have spent huge amounts of money to replenish fiscal demand to jumpstart their economies through the pandemic and its aftermath. As a result, China has suffered five consecutive quarters of economy-wide deflation (a sign of a lack of demand). The People’s Bank of China’s latest move is unlikely to change this trend.
Ilya Spivak, Global Head of Macro at Tastylive, has 15 years of experience in trading strategies and specializes in identifying thematic trends in currencies, commodities, interest rates and equities. He is the host of Macro Money and co-host of Overtime Monday through Thursday. @Ilyaspivak
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