The Federal Reserve’s about-face is getting the headlines globally. But the real fireworks in the months ahead may come from the People’s Bank of China.
Thursday’s liquidity boost was but a preview as Donald Trump’s trade war throws China off balance. The US$72 billion the PBOC churned into markets was to support financial institutions. But as exports sputter and corporate profits take hits, China’s central bank will be taking short-term rates lower in ways that shake up world markets.
China is leading a race to the bottom on borrowing costs. Recent days saw a flurry of rate-cutting activity from Kuala Lumpur to Manila to Mumbai to Sydney. Bank Indonesia, which hiked rates six times in 2018, is telegraphing an easing move. In Japan, weak household spending, wages and exports may soon have the central bank stimulating again.
But China’s moves are different for two reasons. One is latitude. The PBOC has 435 basis points worth of formal short-term borrowing costs to cut. That is nearly double the space Fed Chairman Jerome Powell has to ease. It is 310 basis points more ammunition than the Reserve Bank of Australia has and fully 435 basis points more than Frankfurt or Tokyo have at their disposal.
Two: the odds of trolling Trump into even bigger trade-war actions. The yuan’s slide toward 7 to the US dollar is sure to irk Trump and his trade negotiators. Trump has been threatening to more than the double the $200 billion of Chinese goods that he is currently taxing at 25%. A weaker exchange yuan rate would almost surely have Trump pulling that trigger.
PBOC actions could indeed draw reactions from Trump. Of course, any steps China’s central bank takes to ease credit would leave Trump just as envious as he is angry.
For months now, Trump has been after the Powell Fed to lower rates. To Trump, the Fed’s four tightening steps in 2018 were akin to self-flagellation. He’s called the world’s most powerful monetary authority “crazy” and talked about firing Powell. Now, Powell says the Fed may be willing to lower rates to counter fallout from the trade war.
Yet to China’s Xi Jinping, lower Chinese rates also would bear Trump’s fingerprints. With economists like Iris Pang of ING warning mainland growth may slide below 6%, it’s not surprising that Beijing is shifting back into stimulus mode.
Signs of turmoil are showing up in China’s financial system. Last month, Beijing engineered a rather rare seizure of a troubled lender – this time in Inner Mongolia. In taking over Baoshang Bank, China signaled it’s taking no chances with risks that could prove systemic. In a Reuters interview, economist Alicia Garcia Herrero of Natixis called it “China’s mini-Lehman moment.”
Trump’s trade war is proving to be a much bigger threat to China’s economy than America’s subprime meltdown in 2008. Back then, Xi’s predecessor Hu Jintao, switched all of Beijing’s stimulus engines to the highest setting. Though it shielded China from the worst, the bill is now coming due. The $34 trillion mountain of public and corporate debt Beijing had even before Trump’s is still growing apace.
That’s why Xi is keen to let the PBOC hit the accelerator where needed. In recent months, fiscal policymakers rolled out tax cuts and lending programs for banks, state-owned enterprises and fresh public works spending. Efforts to date, though, probably won’t be sufficient if growth dips into the 5% range and spooks global confidence.
Hence the PBOC’s moves to expand the list of qualified recipients for its liquidity-boosting efforts. A week before Thursday’s US$72 billion injection, the central bank made an earlier infusion – its largest in four months, in fact. Expect much more to come, including official rate cuts.
That goes, too, for monetary powers around the region. From Seoul to Jakarta, policymakers are resuming their first-responder role as Trump Vs. Xi upends supply chains and markets everywhere.
In Australia, there’s even buzz about the RBA giving quantitative easing a try. And Japan, which is been stuck in QE for some 20 years now, is under pressure after exports fell for a fifth straight month. Economists at JPMorgan Chase expect the Bank of Japan to step even deeper into the monetary unknown by September.
But China’s monetary authority will steal the show, early and often. And perhaps set the stage for additional turbulence to come.