There’s been a slowdown in this month’s bond burn, and China continues to fall short of what markets think is needed to stabilize its economy – making for another nervy start to the financial week. Although prompted by a deepening property sector bust and worrying economic activity undershoot, China’s latest widely expected interest rate cut on Monday was surprisingly small – underscoring concerns that official efforts to shore up the economic malaise are still just piecemeal.
The People’s Bank of China lowered its one-year lending rate by only ten basis points to 3.45% – less than the 15bp cut that had been forecast – and left other rates unchanged. The move sent yields on Chinese bonds crashing, widening the gap with global peers, further depressing the yuan, and risking outflows.
China’s economy is battling deflation, a property sector meltdown, and record unemployment among younger Chinese. It also needs the West to sustain its manufacturing exports, a crucial source of hard currency.
In the past, Beijing has proved to be a master at navigating such challenges in a highly leveraged economy. But with the country now deeply in recession and its currency sinking into bear market territory, it’s still being determined whether the pragmatism that once underpinned China’s policymaking can return.
A fresh round of economic stimulus aimed at stabilizing growth and supporting the yuan is expected to be announced this week. Analysts say Beijing may inject cash directly into the economy, cut interest rates and bolster local government debt financing. They are also likely to announce more measures to encourage private investment in critical sectors, such as the railways and healthcare.
Despite weak data, the government is sticking to its target growth of around 5% this year. But that is seen as a conservative goal, especially as the country grapples with a property bubble and slowing domestic demand.
The yuan fell 1.8% against the dollar on Monday and is now trading near a four-year low. Investors are worried that China is headed for a hard landing as its economy slows and that this could hurt global growth.
Meanwhile, a series of rainfall events in California triggered debris flows on Saturday in the area devastated by the Silverado wildfire. The resulting floods have forced the closure of many highways in Orange County and parts of Los Angeles.
