China’s Central Bank Is Trying To Wake The Country's Economy Up

China’s Central Bank Is Trying To Wake The Country's Economy Up
Paul Allison, CFA

6 months ago2 mins

What’s going on here?

China’s central bank cut a major interest rate on Thursday, an effort to pull its worn-out economy out from under the covers.

What does this mean?

China’s economy has been hitting the snooze button this year, refusing to seize the day and produce the 5% pick-up the government’s been hoping for. Just look at the latest data: retail sales and industrial production were too sluggish to meet expectations in May, with the latter creeping up just 3.5% on last year’s locked-down economy. Frustrated, the central bank’s been cutting rates to get spending up and going, this time chopping its main medium-term interest rate from 2.75% to 2.65%. And while that might not sound like much, three rate cuts in a week are the equivalent of splashing cold water on the face of a stubborn sleeper.

Chinese economy weakens
Source: Bloomberg

Why should I care?

Zooming out: We used to hang out.

The world’s biggest economies were buddies for decades after China entered the World Trade Organization, with the clique’s fortunes moving pretty much in sync. But then the pandemic’s lockdowns, backed-up supply chains, and political tensions reminded them that you can’t rely on anyone, and countries like the US, UK, and China became increasingly focused on themselves. That’s not the worst deal for active investors: it means individual economies perform more independently, and for every floundering economy, there’s usually one flourishing.

China rate cut

For markets: Decent exposure.

Plenty of colossal US firms make a lot of money from their Chinese businesses – well, at least they used to. Now that China’s sagging economy is weighing on the likes of Nike and Estée Lauder, their share prices are reflecting that extra burden. But China’s government isn’t known for half measures, so these policy moves are likely just the warm-up. So if and when the country whips out its big bazooka (oo-er) and fires out cash, even US companies should catch some notes.



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