China’s Rate Cuts and its Impact on the United States
Headquarters of the People's Bank of China (PBOC), pictured in Beijing, China on September 28, 2018. (Photo: Jason Lee/REUTERS)
On Tuesday, Sept. 24, 2024, China announced that its central bank, the People’s Bank of China, will cut its seven-day interest rate from 1.7% to 1.5%. The rate cut, along with a 1 trillion yuan liquid injection, aims to boost their economy that was affected by the COVID-19 pandemic. Deflation and a real estate slowdown have heavily impacted China's growth, and additional policies will accompany the rate cut to stimulate its slowing economy. While the cut primarily applies to mainland China, it indirectly affects Hong Kong and Macau due to their close financial ties.
A week earlier, the United States Federal Reserve had cut its interest rate by 0.5%, doubled the expected 0.25%, in hopes to stabilize the economy amid heavy inflation. Unlike the muted response to the Federal Reserve rate cuts, China’s rate cuts had a more significant impact on the global market. Chinese stocks surged, and billionaire investors like David Tepper announced plans to increase his investments, calling it a “buy everything” moment due to depressed valuation. Major tech companies like Alibaba, which Tepper invests a lot in, are expected to see strong returns as they trade at low price-to-earnings ratios.
However, long-term risks remain, with China’s economy still unstable and hampered by weak consumer confidence. These issues limit the effectiveness of monetary policies, and investors will need to monitor the market closely. Despite these challenges, global investors reacted more strongly to China’s rate cuts than to the Fed’s.
The recent appreciation of the yuan followed China’s rate cut and liquidity injection. As the U.S. dollar weakened in response to the Federal Reserve’s rate cut, the yuan's rise pushed investors toward other currencies. Capital inflows increased as exporters converted earnings back into yuan. This appreciation could also hurt exports by making them more expensive and less competitive globally, potentially worsening the trade imbalance between the U.S. and China.
Construction cranes are seen near the central business district in Beijing, Aug. 8, 2024. (Photo: Ng Han Guan/AP Photo)
Though the new policy supports liquidity, it will not address deeper problems like the real estate debt crisis successfully. Borrowers who are afraid of borrowing will remain hesitant, and even with lower interest rates, potential borrowers struggling in the real estate market will also hesitate with loans due to the overall economic slowdown and uncertainty. The market is fluctuating not only domestically for Chinese citizens, but also on an international level. Therefore, it is advised that broader fiscal policies and measures are to be implicated to restore consumer confidence.
The Belt and Road Initiative (BRI), introduced in 2013, aims to boost economic growth and global trade by connecting Asia, Europe, and Africa through a revived maritime "Silk Road" and port development. While the recent rate cut may temporarily stabilize China's economy, challenges like foreign currency fluctuations could expose vulnerabilities in its global growth ambitions such as the BRI.
The U.S. Federal Reserve's rate cuts typically have a significant influence on the global economy, but this time, China's more aggressive measures have had a larger impact. These policies reveal deeper economic instabilities that rate cuts and liquidity injections alone cannot resolve. Structural issues such as the real estate crisis and weak consumer confidence cannot be overlooked. How will future fiscal policies restore confidence and address the debt crisis? And how will the yuan's appreciation affect the global economy and trade relationships?