For the first time, the mainland joined an international co-ordinated rate cut last week, albeit not announced jointly. This is the second rate cut since the cut made a day after Lehman Brothers Holdings announced its bankruptcy. Both cuts coincided with global market events, but the real reason is a domestic economic slowdown and the evaporation of inflationary pressure from domestic and international sources.
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Mainland Recovery Tied to Mess in US, Europe
Zhang Ning
13 October 2008
For the first time, the mainland joined an international co-ordinated rate cut last week, albeit not announced jointly. This is the second rate cut since the cut made a day after Lehman Brothers Holdings announced its bankruptcy. Both cuts coincided with global market events, but the real reason is a domestic economic slowdown and the evaporation of inflationary pressure from domestic and international sources.
Do not expect a quick fix to the global financial market turmoil. It is almost certain the US and European economies will go into a pretty deep recession at best, while China will probably continue to pull out stimulus measures. Since there is still plenty of room for Beijing to cut interest rates, it is likely that there is more than one to come before year-end.
Some people still worry about inflation on the mainland as the consumer price index and the producer price index numbers have not yet fallen much. They argue that lowering rates too fast may risk pushing prices up again. It is almost certain after both money and bond markets exploded in September that the real economy is finally threatened.
Many firms are now shut out of the credit market, facing financial difficulties and in danger of going out of business. That was why the US Congress passed the expensive bailout bill even if it smelt like helping the greedy Wall Street players after they brought everyone else into this mess.
Europe is perhaps in an even bigger mess than the United States. Commodity prices are starting to collapse. We are not sure where the world is heading, especially when it is difficult to predict what a fragmented Europe is going to do. The fragile world economy may not support an inflationary environment.
The mainland economy, though, faces more downward risk than overheating. If the world is back to normal, the domestic slowdown has not been severe enough that monetary easing will not work. Facing the global economic uncertainty, Beijing’s policy responses will depend on where the world is heading to. It is all but certain exports will be hurt and so cannot be relied on for this recovery.
Investment growth is hard to come by, as it never really slowed down much to begin with. For policymakers, the grudging answer is property. The authorities had correctly fought a property bubble in developed regions, successfully bringing down prices by choking off demand and financing for developers.
Prices have fallen in the Pearl River and Yangtze River deltas and are likely to drop for large visible projects in Beijing. If policies ease for the property sector after prices have come down significantly, Beijing will have engineered another perfect landing in this economic cycle.
The biggest risk to the mainland now is its economic exposure to the world. Its financial market has not been affected much by the severe credit crisis other than sentiment, thanks to its closed capital account. China’s financial system will probably remain healthy even if the crisis continues for a while. But as growth depends on exports, a severe recession in most of the world will not bode well for the Chinese economy.
So far, people can draw on experiences from the Depression of the 1930s. But no one is sure how the US economy will fare after the decisive bailout plan is implemented. There is even more uncertainty on how Europe is going to cope with the crisis. These are likely to be the deciding factors of how fast the mainland can recover from the slowdown.
In any case, we don’t believe China will slip into too deep a trouble in the current cycle. There are many mainland firms listed offshore. Most of them have access to the domestic and international credit markets. The market may have punished these companies too much. After all, China is facing a slowdown after fighting inflation, not the desperate situation of a financial systemic collapse.
The cuts in the US and Europe have not calmed the market because western financial institutions’ very survival cannot be solved by interest rate cuts. In China, interest rate cuts are executed in a normal economic cycle. It is likely that rate cuts, in combination with other stimulus measures, will give the mainland economy a shot in the arm and it will react to them in 9 nine to 12 months.
Zhang Ning is a fellow at the Securities Research Institute at Peking University
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