The PBOC's fear of too loose a monetary policy appears to have subsided
Forecasts for a second year of strong global growth face two main dangers: the health of China’s economy and the prospect of much higher U.S. interest rates.
How the world’s commercial poles navigate these risks will determine whether 2021’s rapid expansion was a blip or whether the recovery will outlive the pandemic.
China appears determined to quash — rather than live with — COVID-19. An overly muscular economic response, too, may do as much harm as good. Forces unleashed by the disease, such as supply chain snarls that are pushing prices higher and shutdowns of major Chinese cities won’t dissipate overnight. Success will hinge on the ability to be nimble.
China reported Monday that gross domestic product rose 4% in the fourth quarter from a year earlier, down from the 4.9% initially recorded in the preceding three months. While better than many economists anticipated, we have become so accustomed to exceptionalism that a “4” handle rates as a disappointment.
Less than an hour before the GDP numbers were released, the People’s Bank of China lowered a key rate for the first time since April 2020. This kind of light-footedness, simultaneously curtain-raiser and response, needs to be a big feature in the coming year. For Beijing, the risks of too tepid a response are significant. The relative modesty of the reduction — 10 basis points to 2.85% — shouldn’t obscure the symbolism.
The last time officials reduced the one-year policy rate, China was coming off its first contraction in decades. Authorities are now wrestling with a deepening property-markets slump and disruptions from the coronavirus. Sporadic outbreaks toward the end of last year triggered a lockdown in the western city of Xi’an, which has a population of 13 million.
The spread of omicron elsewhere bodes ill for a relaxation of the government’s zero-COVID approach. Retail sales rose just 1.7% in December from a year earlier, the government said Monday, well short of analysts’ forecasts, and investment slowed. Unlike in the U.S., inflation is cooling in China, giving the central bank room to further reduce borrowing costs. The surge in factory-gate prices looks to be abating: The producer price index rose 10.3% in December, still high, though down from 12.9% the previous month. The pace of consumer inflation slipped to 1.5%, compared with 2.3% in November. Both were lower than economists predicted.
The PBOC spent much of last year trying to balance the need to support the economy with a persistent fear that too loose a stance would fuel a debt binge. As December drew to a close, it was clear the bank’s attitude had shifted. Buttressing growth would be the main game in 2022.
Nudges lower in bank reserve requirements in the second half of last year will likely be followed by more such steps. That’s a different planet from the Federal Reserve, which is now expected to raise interest rates four, or even five, times this year. Inflation has climbed to levels unseen in four decades; the consumer price index jumped 7% in 2021, miles from the Fed’s comfort zone.
Quantitative easing will be wrapped up earlier than envisaged a few months ago, perhaps as soon as the Jan. 25-26 meeting. Officials have floated the prospect of a hike by March. So much has the landscape changed, that investors talk about the Fed needing to shock markets to maintain its reputation.
The central bank could “restore its credibility” with a 50 basis point hike, Bill Ackman, the founder of Pershing Square Capital Management, said in a weekend tweet. Even if a large part of what’s forecast to come can be interpreted as withdrawing stimulus rather than a desire to restrain the economy, it’s still a big shift.
Chair Jerome Powell will need to be careful not to overdo it. China and the U.S., while on divergent paths, have a lot at stake in getting the policy mix right on pandemic management and monetary policy. Despite the popular notion the two powers are engaged in a cold war, they still depend on each other.
Beijing posted a record trade surplus in 2021, according to figures released Friday. Global production is dependent on supply chains that revolve around the mainland. Export gains last year helped offset the domestic slowdown and underscored that factories can’t really function without China.
The global recovery winds through both Beijing and Washington. Their agility will make all the difference in 2022.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.