The People’s Bank of China announced a 50 basis point (0.5 percentage point) cut in the reserve requirement ratio for banks Wednesday, an action the central bank took amid mounting pressure to do so.
The country’s economy expanded just 7.4 percent last year.
Even that figure may not fully reflect the reality of sluggish economic growth.
World copper prices slumped to the lowest level in five-and-a-half years recently, as China accounts for about 40 percent of global copper demand.
The volume of railway freight has declined 4.6 percent in the past 12 months to record lows.
And bank loans and power generation figures also dropped to record lows, even lower than at the height of the financial crisis that began in 2008.
That could mean GDP growth will slow further.
Meanwhile, the onshore renminbi keeps strengthening against the currencies of other major trading partners, although the exchange rate against the US dollar has been weakening and approaching the weaker side of the daily trading band.
The Chinese currency has gained over 10 percent since mid-2014 in tandem with the greenback.
Total social financing dropped 5 percent by the end of December, and even the shadow banking sector plunged 44 percent.
Traditional bank lending grew at a modest 7 percent last year. That shows market liquidity in the mainland remains fairly tight, in particular for small and medium-sized companies.
In fact, interbank lending data and bond yields show liquidity has fallen to its lowest level since early 2009.
What has complicated the scenario is falling property prices.
Prices of new and second-hand homes rose in tandem with economic growth since 2005. Many mainlanders consider property an instrument for preserving wealth.
Therefore, a downturn in the real estate market could create ripples in consumer confidence and in turn drag down economic growth.
That means the economy may face headwinds if the property market fails to reverse the downtrend. If so, the central bank will encounter more pressure to bail out the market.
So the PBOC has had to pump more money into the market in an effort to bolster economic growth and mitigate the pressures from a strong currency.
Nevertheless, the central bank is unlikely to widen the trading band for the renminbi.
Internationalizing the Chinese currency is a key strategy for Beijing, and the redback is already among the top five currencies used worldwide.
China has signed currency swap deals with nearly 30 countries since late 2008.
Therefore, a sharp depreciation of the renminbi may not benefit China, as it would trigger currency wars among emerging markets and exacerbate capital outflows from the country.
This article appeared in the Hong Kong Economic Journal on Feb. 5.
Translation by Julie Zhu
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