China should flex some monetary muscle


Lowest level: Yuan banknotes are seen in this file photo. The currency has slipped to its weakest against the US dollar since November and is down 2% this year. — Reuters

CHINA’S economy got an encouraging start to the year, but now appears to be going sideways – at best. It will be a long road back to robust health.

The most positive spin that can be put on the latest inflation numbers is that consumer prices did at least rise. That’s a low bar.

The case for additional support for the recovery ought to be watertight, if only the very cautious central bank can be convinced.

Inflation that’s just above zero, and has been for the past four months, is a disappointing outcome.

The cost of living for households inched up 0.3% in May from a year earlier. This is only the barest rebound from the worrying streak of declines suffered in the second half of 2023.

Shortly before he left the People’s Bank of China (PBoC), the then-governor told an audience in Washington that 2% was a monetary authority’s dream.

Unfortunately, this blissful state looks more like a mirage for the world’s second-biggest economy.

Add the renewed slide in manufacturing last month, and the optimism that was starting to creep into projections looks premature.

When deflation first started showing up in China last July, the quip was that Federal Reserve (Fed) chair Jerome Powell and European Central Bank (ECB) president Christine Lagarde would die for that kind of outcome.

The duo had just presided over the most aggressive tightening in a generation, and the idea they would be looking to cut their economies some slack was viewed as a distant prospect. But they wouldn’t wish to replicate the China experience. Not then, and not now.

Even though Beijing has put behind that run of falling prices, the prospect of a return is real.

The PBoC appears too relaxed about this, though a lack of autonomy on big calls diminishes officials’ room to manoeuvre.

It’s instructive to review monetary history in Europe and the United States over the past two decades. Neither had to endure deflation before undertaking a big shift in thinking.

A week before former ECB president Mario Draghi made history in 2014 by taking interest rates negative, he gave a speech that warned about the risks of rock-bottom prices.

A prolonged stretch of low inflation can lead to higher-than-expected debt burdens and prompt lenders to curb credit. “This is fertile ground for a pernicious negative spiral,” he said.

The United States had its own flirtation with deflation years earlier. By mid-2002, former Fed chief Alan Greenspan wrote in a memoir, the subject had become the main topic of discussion. “We wanted to shut down the possibility ... we were willing to chance that by cutting rates we might foster a bubble, an inflationary boom,” he recalled.

I’m waiting, probably in vain, for PBoC governor Pan Gongsheng to say anything like this. An inflationary boom may not be top of Pan’s mind. Rate cuts in China would weigh on the yuan, which authorities keep a tight rein on.

On Monday, the currency slipped to its weakest against the US dollar since November, and is down 2% this year. That doesn’t sound like much, compared with the yen’s 10% drop. But because the government restricts fluctuations, interest rates are tied to currency policy.

With the dollar in such robust shape, Beijing will be loathe to cut too deeply, if at all. The root problem, which is above Pan’s paygrade, is that China lacks the kind of monetary independence befitting a formidable power.

The PBoC isn’t without agency. It has the opportunity to do something on June 17 when the bank decides its key rate.

Bloomberg Economics expects a small reduction of 10 basis points in the key rate, though expectations of easing have been repeatedly dashed.

A small cut won’t banish malaise, but that isn’t really the point. The bank needs to show that it’s on the case.

In a normal economy, trims and hikes after a period of stasis are rarely one-offs. They are regarded as signals of intent. This is as good a time to show just a little muscle. — Bloomberg

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.

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