Moneycontrol Pro Panorama | A case of the dragon blues

China's willingness to tolerate low growth comes at a price for the rest of the world economy.

Dear reader, 

It’s risky to second-guess what China’s government or policymakers are up to. On Sunday, the FT reported that the country's central bank was set to make big cuts to two of its core lending rates — the 1-year and 5-year loan prime rates — in order to revive the economy. Consensus estimates by Bloomberg had pegged the rate cut at 15 basis points for the 1-year LPR and a similar rate cut for the 5-year rate would mean big rate cuts after a long interval.

But Beijing stuck to a script that has, for some time, baffled those who closely watch its economy, who wonder why the government and policymakers seem alright with the economy grinding through a slowdown. On Monday, the People’s Bank of China delivered not a 15 bps but a 10 bps cut on the 1-year rate and left the 5-year rate unchanged. While this move may tick the box of policy being supportive of growth, its ability to stimulate growth meaningfully is doubtful. Some answers may lie outside economics.

Vivek Kelkar believes that ‘Xi Jinping’s ideological dictums leave China in a soup over economic growth’, he identifies five critical problems that China faces. Four of them are related to economics while the fifth is a spillover of Xi Jinping’s political ideology into economics. He writes, “The contradictions in Xi’s ideology, as a functional instrument beyond political rhetoric, that seeks to mobilize economic instruments for growth, negatively impact the very economic governance system that gave China its growth”.

In the FT (free to read for Pro subscribers), Ethan Wu has a very different take to explain China's approach, writing that the country's problem may not be a balance-sheet problem (which can be eased by lowering rates) but a “near-term, fixable confidence deficit and the longer-term, harder-to-fix breakdown of its property investment-led growth model.”

China's willingness to tolerate low growth comes at a price for the rest of the world economy, writes Ajay Bagga. “Around the globe, a weakening Chinese economy means a shrinking of demand for major goods — from soybeans harvested in Brazil, to intermediate engineering goods from East Asia, to luxury goods made in Europe. It spells less appetite for metals, oil, minerals, and other building blocks of industry.” Bagga says some strong measures from China’s policymakers are needed soon but Monday did not bring that news. A status quo means higher risk of a global slowdown and a risk-off sentiment, he writes. Do read his sharp insights.

If the world’s second-largest economy seems to have frozen like a deer in front of oncoming headlights, the US economy is going through its own hand-wringing ceremony. What to do with inflation that refuses to be slayed, while a healthy economy is suspected of keeping it well-fed, is a problem Fed chair Jay Powell is faced with. This week, on Friday, the annual pastime of reading the Fed chair’s lips at his Jackson Hole conference speech will take place.

Mohamed El-Erian, a critic of the Fed’s costly misstep of treating inflation as being transitory, wrote in the FT an insightful column on the strategies in front of Powell to send a signal to the market. He writes: “Indeed, I would not be surprised if it is not the availability of topics that will determine what he opts to say on August 25 but a personal calculus driven largely by risk assessments”.

While all this is in the macro, investors will be thinking if the top-down looks so confusing and difficult to predict even for experts, then the micros are a better place to start for them. Here’s our research team’s cross-sector analysis of how Q1 earnings have fared, with those that are focused on the domestic market doing well while those that are export-dependent feeling the heat of a global slowdown. Do read to identify sectors to keep a watch over.

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Ravi Ananthanarayanan
Moneycontrol Pro