china: Interesting times for China after rate cut

China’s surprise interest rate cut this week has an immediate effect on India through its impact on commodity prices. Commodity prices have declined on the news and expectations that more stimulus would be required to restore momentum in the world’s second-largest economy. China is also India’s second-largest trading partner, although the balance is heavily titled in its favour. The second-order effects of China’s slowing trade with the US and the EU are likely to be felt through interest-rate movements, as these economies try to avert a deeper-than-anticipated slowing down of growth. Beijing has the policy space to reduce lending rates further because of low core inflation. But it has been wary of adding to heightened debt levels. There are also questions over whether the People’s Bank of China (PBC) can revive lending amid continued coronavirus-instigated lockdowns and a property market slowdown where homebuyers have threatened to stop making mortgage payments.

A sputtering Chinese economy is one of the key risks flagged by the International Monetary Fund (IMF) that could pull down global economic growth. The country recorded its weakest quarterly growth in two years at 0.4%. Missed estimates in retail sales, factory output and investments in July that led to the rate cut by the Chinese central bank are causing downward revisions in full-year growth projections by independent economists to below 4%. Beijing has so far given no indication that it will deviate from its stance on a ‘zero-Covid’ policy, even as the rest of the world has dropped restrictions. And a crucial congress of the Chinese Communist Party (CCP) that is expected to clear the way for a third term for President Xi Jinping will take place as joblessness among the young is at a record high.

Chinese lending to advanced economies and to the developing world is tied to its growth rate. A slowdown also affects global supply chains, and businesses could accelerate their ‘China plus one’ strategies, which could benefit India.