China Stimulus Unlikely to Reduce Global Recession Risk

Economic growth now relies on the U.S. as the Eurozone limps along.

• China has announced a new stimulus program to revive its anemic economy.

• But global economic growth now relies on the U.S. as the Eurozone limps along.

• Finding a safety net in China appears unlikely as its policy easing falls flat yet again.

China unveiled a raft of new stimulus measures in a bid to revive its ailing economy, which has yet to rebuild momentum after starting to reopen from stringent “zero COVID” lockdowns in late 2022. The People’s Bank of China (PBOC)—he country’s central bank—cut interest rates, lowered bank reserve requirements and pushed out support for housing.

China’s target seven-day reverse repo interest rate came down from 1.7% to 1.5% and the weighted average reserve requirement ratio (RRR) for the country’s banks declined from 7% to 6.6%. The PBOC also cut the rate payable on existing mortgages by an average of 0.5% and reduced the down payment required on second homes from 25% to 15%.

The central bank also sought to shore up the stock market. It said that it will offer 500 billion yuan ($71 billion) in financing for Chinese firms to buy local shares. It will also set up a swap facility unlocking close to 800 billion yuan ($114 billion) in liquidity for securities companies, funds and insurers to finance equities purchases.

No safety net: global economic growth relies on the U.S.

These efforts come at a time when the world economy can ill afford another headwind. Purchasing managers’ index (PMI) data released earlier in the week showed divergent performance in the Eurozone and the U.S. Those two economies along with China make up about 50% of global output, making conditions there defining for the fate of the whole.

The figures showed growth in the U.S. remained well-supported in September. The pace of economic activity expansion jumped to a one-year high in May and has held up there for four months now, underpinned by a resilient service sector offsetting a deepening slump in manufacturing.

Meanwhile, this month marked the second-worst performance of the year for the Eurozone. The regional economy shrank for the first time since February, and at the fastest pace since January. Service sector growth slowed to a near standstill while conditions on the manufacturing side continued to deteriorate, hitting the worst levels since December.

Reviving China’s economy: too little, too late … again

If China’s stimulus push were to succeed it that would amount to a crucial safety net for the world economy at a time of near-singular reliance on U.S. demand. Unfortunately, recent experience suggests the new effort will amount to another in a series of half-measures that fail to deliver lasting results.

Local stocks dutifully jumped as the PBOC made its announcement. They did the same when China directed the sovereign wealth fund to buy into local markets and later replaced the head of its securities regulator. All those gains have been erased. A stream of interest rate cuts since mid-2021 has failed to revive lending.

That’s because the economy is fundamentally lacking in demand. A PBOC survey of depositors showed saving future income was favored by a margin of 58% over consumption (24.5%) and investment (17.5%). Households’ bank deposits rose to a record high of 132 trillion yuan by the middle of this year.

China has flouted the example of Western countries, where vast sums were spent on fiscal demand replacement to power economies through the pandemic and its aftermath. As a result, it has suffered from economy-wide deflation—a sign of absent demand—for five quarters straight. The PBOC’s latest moves are unlikely to change that trend.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro. 

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.