China's Central Bank Takes Surprising Step As Economy Falters: Why Americans Should Care

The People's Bank of China unexpectedly reduced the one-year medium-term lending facility rates by 15 basis points to 2.5% Tuesday, signaling a proactive stance to support its economy against mounting challenges.

The decision comes as China grapples with the dual threats of a deepening property crisis and sluggish consumer spending and follows a series of disappointing economic indicators.

Industrial production, which had previously shown 4.4% growth in June, slowed down to a 3.7% rise in July, falling short of the anticipated 4.4%. Retail sales posted lackluster year-on-year growth in July, registering 2.5% compared to an expected 4.1%.

China’s urban unemployment rate edged up to 5.3% in July 2023 from its June low of 5.2%, raising concerns about the labor market’s resilience. Of note, the National Bureau of Statistics chose to omit the unemployment rate for individuals ages 16 to 24 in its July economic report, following record youth unemployment of 21.3% in June, sparking transparency worries.

China’s Economic Woes Cast Shadows On Global Economy

With China’s growth slowdown, negative spillover effects are being felt on both worldwide growth prospects and the U.S. economy.

In 2022, the United States exported an estimated $153.84 billion in goods and services to China, with leading categories like oil seeds, fruits and grains contributing $18 billion to the total.

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Goldman Sachs Forecasts Further Easing Measures In China

In response to the PBOC’s rate cut, Goldman Sachs economists revised their short-term monetary outlook. The firm now foresees a 15-basis-point reduction in both the one-year and five-year loan prime rates by Aug. 21.

Expecting ongoing economic challenges, Goldman economists predict two 25-basis-point required reserve ratio cuts in September and the fourth quarter, underscoring proactive liquidity management. A 10-basis-point policy rate cut is anticipated in the fourth quarter.

Markets React: PBOC’s Surprise Move Ripples Through Financial Landscape

The PBoC’s unanticipated reduction of policy rates has triggered a wave of market reactions. The Chinese yuan experienced a sharp decline of 0.6%, reaching 7.32 per dollar, marking its lowest point since November 2022.

Notably, U.S.-listed Chinese equities also bore the brunt of this move, with companies like NIO Inc. NIO witnessing a substantial decline of over 6%, as Tesla Inc. TSLA’s ongoing price cuts compounded the pressures.

Alibaba Group Holdings Ltd. BABA and JD.com JD both experienced declines of 2% and 2.6%, respectively. Tencent Music Entertainment Group TME managed to buck the trend, recording a 3% increase, despite presenting weaker-than-expected financial results in the last quarter.

Chart: US-Listed Chinese Stock Reactions Thursday

Photo via Shutterstock.