China’s ‘First in-First out’ situation marveled many as most of the world still grappled with the pandemic. The curbs placed and sophisticated management of the healthcare system played a huge part in stabilizing the Chinese economy before it bustled through while rest of the world struggled. Now China goes about in a surprising shift of perspective. While the United States has evidently adopted the stance of an ‘overheating’ economy, China expects the growth to pane trajectory a little further. While the Federal Reserve ponders over cutting out its asset purchases and raise federal interest rates, the Peoples’ Bank of China (PBOC) – China’s Central Bank – announced a cut of 50 basis points in the Required Reserve Ratio (RRR) for all the banks within China. The move would stimulate the market by allowing excess liquidity to the banks in the short run. The cuts would be effective from 15th July, releasing an estimated 1 trillion yuan – equivalent of $154 billion – in liquidity throughout the Chinese economy.
The announcement came about as the PBOC geared up in the recent policy meeting to face the rebounding global economy with a more flexible and relaxed monetary policy to cash on the escalated growth witnessed by China as 2020 eclipsed into 2021. However, the recent economic data projects a slowdown in the growth of China’s economy. The Chinese economy grew at a record rate of 18.3% in the First Quarter of 2021. The growth peaked as the Communist regime triumphed over the pandemic with a fading 2020. However, according to the Bloomberg economists, the Chinese economy has relatively cooled down in the last few months. The estimates signify that the Chinese economy cooled down and posted only 8% growth in the Second Quarter of 2021.
The cooldown is primarily associated with the manufacturing and retail sectors. Despite a controlled response to the pandemic, industrial production suffered the brunt of the curbs imposed to control the spread of the virus. With the reemergence of covid variants, the global economy has further inched towards uncertainty which has dampened the positive outlook of the world economy. China stands as a prime example to evoke a realization – is any economy actually recovering or simply booming and bursting on the whims of the pandemic and the efficiency and effectiveness of the national response. Truth be told, China did succeed to curb the virus and cease the catastrophe. Yet, China’s economy still slowed down with time as the fear of another bout of infections started to loom.
While it is natural that the economic booms post any crisis eventually descend over time, the plunge is comparatively faster and sooner than originally expected – not only in China but for the majority of the developed economies around the world. As the vaccination rates are running sporadic and the general sentiment is still wary of the Delta variant, both the growing retail sales and the flooding fixed asset investments are dipping to moderation from record-high levels. As PBOC wants to plateau at the moderate levels of growth and avoid staggering markets, the monetary policy is gradually shaping up in a dovish stance.
The reduction in the reserve requirement would allow the banks to hold a relatively greater supply of money as a proportion of their total deposits. Therefore, driving more money available for lending: setting up a cushion for a monetary policy to eventually lower the interest rates in months to follow. However, with China’s economy projected to cool down further in the Second Half of 2021, simply pushing down the reserve requirements won’t be enough. Experts believe that despite a systematic response to covid and an efficient inoculation drive, the new variants and global restrictions would continue to inhibit China’s path of recovery.
Last week, China’s Monetary Policy Committee forecasted that the economy would further slow down to 6% in the Third Quarter before settling at a 5% growth rate by the end of 2021. Thus, while the 50 basis point reduction in the reserve requirement would boost the market sentiment and support the small and medium businesses to prosper, the impact would be transitionary in nature. An easement of short-term liquidity would not drive a sustainable market rally. Therefore, while the move comes as a welcome sign, a legitimate directional shift in China’s monetary policy is required to appease the investor and consumer sentiment that is hampering a sustained recovery process for China.