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China’s economic prudence is a problem for all of us


The Chinese central bank protests too much. Beijing is wary of overdoing its efforts to shore up the ailing financial system and faltering economy, but continues to be pressured to roll out new measures. New milestones are announced almost daily, though many are modest in scope. China faces at least another year of lackluster expansion, and global growth will face significant challenges if the tyranny of incrementalism continues. There are few reasons to be optimistic.

The latest initiatives of the People’s Bank of China show growing concerns. Investors were surprised by official interest rate cuts last week, although the magnitude of the adjustment was meager by global standards. SOEs are being pressured to extend more credit and $29.3 billion in special loans will be offered to ensure property projects are delivered to buyers. The yuan is near its lowest level in two years and has lost more than 5% against the dollar in the last 12 months; officials likely see some depreciation as a way to boost exports, provided the currency pullback is not dramatic. On Wednesday, the Chinese cabinet presented a set of 19 points to keep the economy afloat. It sounds impressive, even if the details were less encouraging. Committing an additional 1 trillion yuan ($146 billion) in additional funding, largely focused on infrastructure, will not have a huge impact.

It is safe to assume that further developments are on the way. Last week, a PBOC-backed newspaper endorsed additional support in a front-page story. No wonder economists are forecasting further rate cuts and additional measures to put a floor under the decelerating expansion – assuming there’s one left to protect. Leaders seem to be constantly catching up. The objectives seem to be in competition: no sooner have the plans to support growth been announced than those in charge remind us that they are reluctant to embark on a large-scale detoxification of the economy.

Premier Li Keqiang has resisted a massive bailout, saying last month that he will “not outrun the future”. Caution reflects bitter experience. China triggered a huge stimulus during the US subprime mortgage crisis. This helped the world through a severe recession, but produced a major over-indebtedness for banks and government-preferred companies. However, the Chinese economy now finds itself in a very different situation. It was already slipping into low single-digit growth before Covid hit in early 2020 – that’s compared to the period following China’s accession to the World Trade Organization in 2001, when the gross domestic product has jumped more than 10% per year. Is Beijing’s politics tied to the traumas of the past rather than the demands of the present?

Today, activity is weakening again after a strong initial rebound from a contraction at the start of the pandemic. There is no doubt that the state will do more. The argument is about scale, efficiency – and communication. The difficulty in articulating a clear path is compounded by the collar that Covid-zero has around business and social life. It’s hard to make projections when you don’t know how many big cities are going to be closed and when. This means tough times for forward orientation.

The authorities cannot simply give up. The PBOC needs to try harder not to trip over itself. Before the latest rate cuts, the bank was striking an almost hawkish note. Governor Yi Gang is right to keep an eye on inflation, but it is only a fraction of the level experienced by other major economies. “China is increasing monetary stimulus in small steps,” according to Eric Zhu of Bloomberg Economics. “With traditional tools failing to gain traction, a bigger policy shift will be needed to get growth back on track.”

While deviating from gradualism needs the go-ahead from the Communist Party leadership, Yi is far from paralyzed. Since large parts of the economy are tied to the state, all measures taken by the PBOC can pass through targeted sectors. “We view the central government’s introduction of bailout funding as the first significantly positive development in the past five to six weeks,” Jizhou Dong and Stella Guo, analysts at Nomura Holdings Inc., wrote in a note. sunday.

How long before the folks at the PBOC start talking about some version of “whatever it takes” from former European Central Bank President Mario Draghi? Right now, they sound more like former Federal Reserve chief Ben Bernanke and ex-Treasury Secretary Hank Paulson when they insisted that America’s housing slump would be ‘contained’ and probably wouldn’t sink the broader US economy, let alone global finance. Draghi, too, did not get there overnight; the ECB has had its share of failed half measures.

Chinese policymakers still have a way to go. May they get there soon.

More from Bloomberg Opinion:

• PBOC cut indicates China’s outlook must be dire: Daniel Moss

• Don’t believe forecasts. China is fine: Anjani Trivedi

• Surprise data from China could spell recession: John Authers

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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