China’s Central Bank Just Made Another Move

China’s Central Bank Just Made Another Move
Paul Allison, CFA

9 months ago2 mins

Mentioned in story

What’s going on here?

China’s central bank cut a key interest rate on Tuesday to entice some bulls into the country’s oh-so-fragile shops.

What does this mean?

China’s reopening was expected to bring the type of energy, excitement, and unbridled, over-budget spending usually reserved for Walt Disney World on the first day of Christmas break. In reality, though, the economy’s been strolling on like a tired parent wielding a half-eaten giant turkey leg. So to give the country a kick in the pants, the People’s Bank Of China cut a short-term lending rate from 2% to 1.9%. That might sound small, but it comes straight on the heels of China’s six biggest banks trimming their deposit rates last Thursday. Put it all together, and it’s clear the government’s trying to breathe life into the world’s second-biggest economy, stat. So you can bet the country has more economy-aiding tricks up its sleeve, and may well cut medium-term interest rates on Thursday too.

China policy rate cuts

Why should I care?

For markets: Confidence is key.

Supply and demand are like a pair of lovestruck teenagers: no matter what gets in their way, they’ll manage to climb through a window and end up back together. But two years of on-again, off-again lockdowns has brought a meddling third party into the mix: whiplashed Chinese consumer confidence. See, pandemic-scarred folks within the country are saving instead of spending. That’s a problem: those supply and demand corrections have allowed the rest of the world to get on with life, but China still can’t shake its pandemic past.

The bigger picture: Let’s all get along.

China’s tactics have brought the country’s currency to a six-month low against the dollar, which could float both China and America’s boats. The weak currency will make Chinese exports more appealing to other countries, and inflation-filled America certainly wouldn’t complain about importing more for less. That’s if the two can avoid political mud-slinging, mind you.

Renminbi vs dollar
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