PBOC surprise suggests China’s outlook is truly dire

China central bank

China’s faltering economy requires a lifeline from the central bank, regardless of admonitions that inflation is creeping higher and needs to be contained. With growth struggling and demand for credit cratering, the People’s Bank of China has made clear that it’s the recovery first. Price  increases might be worrying, but are a second order problem — for now. Beijing must consider the outlook dire.

The PBOC lowered a key interest rate Monday, a surprise for economists and the first trim since January. The reduction in the rate on one-year policy loans was modest by the standards of global adjustments in borrowing costs — 10 basis points — but it was jarring because the central bank had sounded distinctly less dovish of late. Just days earlier, officials appeared to steer investors away from the notion that rate cuts could ride to the rescue. The emerging danger was inflation; still modest relative to the US and Europe, but nevertheless picking up.

It’s not that China’s recovery, which has gone from world beating to disappointing, couldn’t use an assist. Credit growth nosedived last month, hurt by property market travails and anemic demand from companies and consumers. Less than an hour after the rate cut, reports showed industrial production trailed estimates, retail sales grew less than anticipated and investment slackened. Youth unemployment is at a record and approaching 20%. The downbeat data makes the government’s annual growth target of “around 5.5%” even more of a stretch.

The PBOC needs to do much better on communication. That’s a basic requirement for the monetary authority of the world’s second-largest economy — and one with aspirations to world leadership. The bank’s quarterly monetary policy report, released Wednesday, pledged to avoid massive stimulus and excessive money printing. Consumer prices climbed 2.7% in July from a year earlier, the most in two years. Inflation may exceed 3% this year, the authority projected. “We can’t lower our guards easily,”  the report said.

While the PBOC might have been trying to push back against expectations of massive stimulus, there are clearly limits to resistance: Unlike its counterparts in other big economies, the central bank isn’t independent of the government. If ordered by Communist Party leaders to undertake further cuts, policy makers are hardly going to refuse. Moreover, the economy is likely to require more assistance on the monetary front. Persistent Covid-19 flareups and Beijing’s preference for lockdowns will put the brakes on any meaningful pickup in growth.

With some sympathy for PBOC Governor Yi Gang, it’s worth noting that the Federal Reserve and the European Central Bank — seen as the gold standard for autonomy — have also endured embarrassing communication stumbles the past year. While the Fed and ECB have hiked, Beijing’s reduction will strengthen the narrative that world’s main economic engines are moving in fundamentally different policy directions. Neither encourages the view that the world can avoid a fresh slump.

China is both contributing to, and victim of, a faltering world economy. When the International Monetary Fund slashed its forecasts last month and warned of the prospect of a new global recession, one of the biggest revisions was for China. Over past decades, we are more used to China being a source of resilience when other powerhouses like the US, Europe and Japan teeter. That’s not the case now. Such lower growth in major economies reduces demand for the products China makes, compounding the challenge.

Don’t think the PBOC is done yet. Better to watch what the bank does, at least as much as what it says.