Why is China slashing interest rates?
As the rest of the world tightens monetary policy by hiking interest rates, China is slashing rates. Two rate cuts in August and a promise of more to come. Developed countries must raise interest rates to mimic US rate rises or their currency will collapse against the US dollar. The US is in a desperate bid to contain inflation. For the rest of us, it’s a simple choice, jump on board or sink.
So why is China jumping overboard?
The rate cuts in China have had the expected effect on their currency, the yuan has collapsed. So why is China willing to risk the deflation of its currency? In truth, their economy is in big trouble. Extended COVID lockdowns and a collapse in property values have sent China into a recession.
The government is desperate to create growth in an economy in meltdown and is willing to risk its currency to do so because they have a safety net – the Peoples Bank of China which they are relying on to create support for the yuan.
Growth in the past has come from property and they are hoping that by cutting interest rates, property growth will return. In truth, it’s a pipe dream given the amount of debt in the property development sector.
Property prices continue to freefall despite rate cuts and the Peoples Bank of China can only do so much before the dam bursts. China is in a lot of trouble and might not be able to build its way into prosperity this time around. The country is choosing COVID zero over economic growth at their own peril.