China Steps Up Policies to Counter Struggling Economic Recovery

Summary

  • This article reports on the Chinese government’s recent measures to boost economic recovery post-pandemic, amidst challenges including a property slump, local government debt, and soft global demand.
  • Economist, Nie Wen suggests further policy support is required, with predictions of imminent interest rate and banks’ reserve requirement ratios cuts.
  • Falling prices, a reduction in company profits, and effects on employment and income are major concerns. Increased policy adjustments and fiscal steps are anticipated in response.
  • Noted are the recent interest rate drops by five of China’s largest state banks and government plans to issue 1 trillion yuan ($140.89 billion) in sovereign bonds for investment funding.
  • China’s economic growth remains on track to hit the official target of about 5% this year, with similar expectations for the coming year.

China’s Economic Recovery Efforts

The Chinese government has recently implemented a range of policies in an attempt to bolster a fragile recovery from the impact of the pandemic. However, these efforts have been hindered by significant property downturn, local government debt, and weak international demand. Furthermore, the world’s second-largest economy continues to struggle to gain momentum.

“Greater policy support is required to counteract the trend of slowing growth,” stated Nie Wen, an economist at Hwabao Trust. Predictions suggest that the central bank will decrease interest rates and banks’ reserve requirement ratios (RRR) in the near future.

Impact of Falling Prices

According to Nie, the reduction in prices is negatively impacting businesses profits, employment rates, and personal income, hinting at possible economic difficulties ahead. On Thursday, the central bank announced that it would increase policy adjustments to bolster the economy and promote a surge in prices, given the growing indications of rising deflationary pressures.

External Conditions and Domestic Demand

China’s statistical bureau highlights the increasing complexity, severity, and uncertainty of the current external environment. Some companies reported that fewer overseas orders and inadequate domestic demand are the main issues they face. China’s consumer prices fell the fastest in three years in November, and factory-gate deflation increased due to weak home demand.

Factory Activity and PMI

Factory activity remained hindered due to weak external demand, highlighted by the ninth consecutive month of contraction for new export orders in December. The factory gate prices sub-index showed contraction for the third straight month, amplifying signs of deflation and pressure on business profits.

Non-Manufacturing PMI and Economic Growth

The official non-manufacturing purchasing managers’ index (PMI) witnessed a slight increase, suggesting a recovery within the services sector. China’s economic growth is likely to achieve the official target of around 5% this year, with expectations for a similar target in the upcoming year.

This situation could potentially impact the forex and trading sectors, influencing assets such as stocks and currencies. Foreign exchange traders, in particular, might need to closely watch the economic events unfolding in China as it could affect the exchange value of the renminbi.($1 = 7.0978 renminbi)

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