China’s Central Bank Supports Xi’s Ambitions Over Immediate Economic Needs
Udumbara
.
For some time now, the People’s Bank of China (PBOC) has straddled the fence on conflicting policy demands.
A recent PBOC quarterly report clearly shows that the bank’s managers have declared their support for Beijing’s ambition to challenge the dollar. The bank has stated that it no longer sees a need to reduce interest rates. It declares that policy is already “moderately loose” and sufficient to support an economic picture that it describes as “steady.” The bank further makes its case by downplaying the recent slowdown in the growth of new loans. Though a drop in loan growth is a classic sign of economic softening, the report, without much explanation, claims that it is tolerable and makes no call to action.
As a further indication of new policy directions, the bank’s report has abandoned previous statements about the need to “strengthen countercyclical adjustments,” in other words, take steps to reverse the economy’s slowing. Now, the report speaks of a need to balance “both counter-cyclical and cross-counter-cyclical adjustments,” in other words, neither stimulate nor retard the economy. Given how little the bank has cut interest rates to date, the persistence of China’s property crisis, and the failure of policies so far to revive consumer spending, all these claims contradict available evidence or the economy’s needs.
This posture in the face of China’s clear economic needs stands as a powerful signal that the bank, at the very least, leans toward supporting Chinese leader Xi’s ambitious project. It has offered confirmation of that leaning by pegging its daily yuan exchange target at higher levels than previously. Reinforcing this position is language in the report that emphasizes steps to improve the “monetary transition” and build a “macroprudential management framework.” In plain language, these statements effectively ignore immediate economic and financial needs and instead focus on the construction of systems to develop operational capabilities to support the yuan as a rival to the U.S. dollar.
However much these changing policy priorities might ultimately support Xi’s ambitions for the yuan and for China, the shifts signal an abandonment of efforts to remedy the country’s immediate economic and financial needs. Lower interest rates and the provision of liquidity to Chinese financial markets would definitely mitigate the ill effects of the country’s property crisis and likely also bring it to an end sooner.
.
Today, even though the nominal rate is lower than it was three years ago, the borrower repays in yuan that have more buying power than when he borrowed. The real cost of borrowing is higher than the nominal rate and way higher than the 1.0 percent real borrowing cost that prevailed in 2022. Monetary conditions are tighter, not looser.
On top of this lack of support for China’s growth needs, the yuan’s strength on foreign exchange markets will heighten the ill effects of the tariffs recently imposed on Chinese goods by the United States, the European Union, and other governments. So far this year, the yuan has risen about 4 percent against the dollar, raising the American price of Chinese products that much more than the Trump tariffs have. The effect, though so far small, has made it that much harder to export to the American market.
What has happened this year is exactly the opposite of what happened when Trump raised tariffs on Chinese goods back in 2018–19. Then, the yuan depreciated against the dollar, so much so that the tariffs barely raised the price of Chinese products for Americans. Accordingly, the flow of Chinese exports continued uninterrupted despite those tariffs. Not so this time.
Only Xi’s quest for China’s and the yuan’s international role can explain the PBOC’s policy declarations amid China’s weak economic and financial environment. In doing this, the central bank is making a very long-term bet and one that is far from assured. Though China has made some progress in internationalizing its economy and the yuan, the dollar’s use in foreign exchange and financial markets still dwarfs that of the yuan.
