Made in America may be stamped on China stimulus

When the Fed cuts bank rates, or convinces people it will do so soon, China has more scope to be aggressive.

Jerome Powell isn’t losing much sleep over China's economic woes, absent a steeper turn south that jeopardizes the robust performance of the US. The feeling is far from mutual. Beijing is showing every sign of watching the Federal Reserve chair closely. Prospects for a meaningful boost to the economy hinge to a significant degree on what transpires at America’s central bank. Specifically, when Fed officials opt to cut interest rates and by how much.

Efforts by China to juice its economy have met with disappointment. Grand-sounding plans, such as encouraging state-backed enterprises to buy stocks, and government pledges to stabilise markets, aren't doing much to boost confidence. A key equity index sank to a five-year low on Friday. On the whole, initiatives have been cautious and vague. Muddling through seems to be the objective. Absent a decisive shift by the Fed, China has limited room to maneuver, in part because officials fear pronounced weakness in their currency, the yuan. The People’s Bank of China can make the odd cut in borrowing costs, but the effect is likely to be muted.
Punitive regulatory measures, such as tightening trading restrictions on institutional investors, will only sap confidence.

Happily, this is likely to change in coming months. Despite the market’s dour view of Powell’s television interview with 60 Minutes, the Fed’s message hasn’t materially changed: Inflation is retreating, hikes are done and reductions are coming this year. The Sunday night audience was different from that which typically parses every sentence, comma and inflection of Fed speak. The broad thrust of what Powell said was similar to that of his press conference after last week’s meeting of the Federal Open Market Committee. Powell told CBS he wasn’t fretting about China, his first public comments on the disappointing recovery in some time. “As long as what happens in China doesn’t lead to significant disruptions in the economy or the financial system, then the implications for the United States — we may feel them a bit, but they shouldn’t be that large,” he said.

Powell may not be too concerned, but he has devoted followers across the Pacific. The PBOC recently offered some revealing insights into its thinking about the Fed and how actions in DC may shape the response to challenges at home. The bank lowered the amount of reserves lenders are required to hold by a larger-than-anticipated amount, and did so on a Thursday during a rare afternoon news conference by central bank Governor Pan Gongsheng. Normally, these type of announcements dribble on a Friday evening , via dry statements on the bank's website.

But more interesting were Pan's remarks about what Powell can do for China. The narrowing of divergent policies between the world’s two-largest economies “will expand space for China’s monetary policy operations,” he said. That's a polite way of saying that when the Fed cuts, or convinces people it will do so soon, China has more scope to be aggressive. Policy has been going in different directions for the world's two pivotal economies in the past couple of years: The Fed aggressively raised rates in 2022 and 2023, but has said its prepared to ease this year.

Arguments are raging in market circles about when this might occur; some investors latched onto March, and might well be disappointed. In the general scheme of things, it matters not whether it occurs in April or June. That it happens is consequential. Pan has clearly been listening. He's also worried about deflation, conceding that inflation is a long way from target. Actually, there isn’t any; consumer prices slipped again in December, marking the longest slide since 2009.  Pan’s predecessor Yi Gang once said 2 percent inflation is a central banker’s dream. By that metric, Pan is wrestling with insomnia.

Why would America's greatest strategic and economic rival be so candid about what things in DC can do for them? At least part of the answer lies in the currency market. Beijing has been contending with a fragile yuan. The currency lost almost 6 percent against the dollar last year, one of the worst performances in Asia. Though the government is fine with some depreciation to reflect fundamentals, it doesn't want a collapse. It’s the pace that matters, not the absolute level. If China is to make the yuan a proper global currency, stability matters. That has argued against a powerful easing. Better to wait until Fed easing weighs on the dollar.

The two nations are often said to be moving in radically different directions, with China emphasising the primacy of the state, and cracking down on everything from education companies to technology, even consulting firms.

The world's biggest economies are, however, intertwined in ways few foreign-policy pundits or industrial wonks would have us believe. Don't just take my word for it. Pan let a few secrets of the temple out. If this coming step-up in stimulus works, it will be stamped Made in the USA.

Daniel Moss is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg