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China’s liquidity trap growing deep and wide

For years, economists debated whether China might go the way of Japan. Though the jury is still out, Beijing is displaying Tokyo-like symptoms in at least one alarming respect: a liquidity trap.

No central bank demonstrates John Maynard Keynes’ warning about getting caught in the monetary mud more than the Bank of Japan. For 20 years now, the BOJ’s wheels have spun faster and faster in a frantic effort to escape deflation.

China doesn’t yet face a lost decade. And Asia’s biggest economy might very well avoid one altogether. But the People’s Bank of China (PBOC) confronts a monetary traction problem just as the economy faces a convergence of headwinds.

With data suggesting a marked economic growth downshift, the PBOC announced a surprise rate cut on August 15. Governor Yi Gang reduced the rate on the PBOC’s one-year loans by 10 basis points to 2.75% and trimmed the seven-day reverse repo rate to 2%.

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