Central banks in major economies around the world have been raising interest rates in an effort to reduce inflation. The People’s Bank of China cut interest rates, in the latest sign of China’s weakening economy.
China’s brutal Covid lockdowns had reduced economic growth earlier this year, but those policies have begun to ease. The newest data indicate that China’s economic problems are deeper than those policies. Despite the lockdowns’ easing, “economic activity slowed across the board in July, including factory output, investment, consumer spending, youth hiring and real estate,” according to the Wall Street Journal.
In response, the PBC cut rates by 0.1 percentage points and injected the financial system with $59.3 billion in new funds. The unexpected rate cut sent the renminbi, which is already having a disastrous year, even lower against the dollar.
That will only exacerbate the problem that China is facing, along with other emerging markets, as investors look for safety. The higher returns that come with the higher risks of emerging markets were worth it when interest rates were low in the developed world. Now that interest rates are higher in the developed world, there’s less reason to take risks in emerging markets. With the People’s Bank of China now cutting rates against the Fed’s rate increases, that process will only move faster — to China’s detriment.
The effect of the PBC’s move on global commodities markets was swift. The Journal reports:
Brent crude futures fell more than 5% to $93.19 a barrel, putting the energy benchmark on track for its lowest closing level since mid-February, before the war in Ukraine sent oil-and-gas markets higher. Copper prices fell 2.5% to about $7,900 a metric ton, and soybean futures lost 3.1% to $14.09 a bushel. China consumes about 15% of the world’s oil, imports more crude than any other country and consumes more than half of refined copper globally.
I’m looking forward to the White House talking about Xi’s Price Cut on gasoline.
Kidding aside, China now seems to be facing a series of crises all at the same time, and they are mostly self-inflicted. The zero-Covid policies, which were unlike those of any other country in the world, hurt China’s economy. They put Xi Jinping in a tricky spot: stay the course and wreck the economy or change his mind and look weak. He chose to stay the course.
Then, there’s China’s foreign-debt crisis, which is a consequence of its Belt and Road Initiative. China is more exposed to developing-world debt that seems unlikely to be repaid than any other country in the world. The financial-system risks are made even worse by the Chinese Communist Party’s efforts in the Chinese housing market, which is in dire straits.
Lurking in the background is the Chinese population crisis caused by the one-child policy. The Chinese needed a bunch of people to be born over the past few decades, and unless they discover time travel, there’s no way to fix that problem now. Crazy as it may sound, the most populous country in the world is running out of people, and likely at a faster rate than previously believed. That spells disaster for economic growth, as the workforce shrinks relative to the swelling population of retirees. And making matters worse, this most recent batch of economic data showed Chinese youth unemployment at 19.9 percent, a record high.
China has found its way out of economic disasters before, so this recent stretch of bad news should not be taken as a firm indicator of the future of the country. But times are tough in China right now, more so than they are elsewhere in the world, and they are tough because of the CCP’s past and present decisions.