Slowdown Deepens, China Resorts to Rate Cuts

Economic indicators show that China’s slowdown deepened in October. The Chinese central bank lowered rates and followed other central banks’ footsteps. While China’s slowdown has been getting global attention, the country’s central bank refrained from major monetary policy measures. Today’s rate cuts helped the Shanghai Composite Index close in the green.

China’s slowdown

The Chinese economy is growing near multiyear low growth rates. Some of the recent data points have raised fears that China’s fourth-quarter GDP growth might be even lower than the third quarter. The data released last week showed that China’s retail sales, industrial production, and fixed-asset investment data were worse than expected in October. China’s October retail sales rose 7.2%—the slowest pace in 16 years. Notably, China’s retail sales growth fell to 7.2% in April.

People’s Bank of China cuts rates

Meanwhile, Alibaba (BABA) reported record Singles’ Day sales last week. However, as we noted in What Alibaba’s Record Sales Say for China’s Slowdown, an online flash sales event can’t be an economy’s leading indicator. Meanwhile, amid a deepening slowdown, China’s central bank resorted to rate cuts. CNBC reported that the People’s Bank of China lowered the repurchase rates to 2.50%. The central bank lowered the rate for the first time since 2015. In that year, China resorted to big bang monetary and fiscal policy stimulus to fend off its economic slowdown. In 2015, China also announced a purchase tax cut on new vehicles in a bid to support the country’s sagging car sales.

China’s slowdown and monetary policy

Interestingly, while China’s slowdown has been getting attention from foreign media, the country has shied away from big bang monetary policy actions. Globally, central banks in developed and emerging markets have been on an easing spree this year. The Fed cut rates by a cumulative 75 basis points this year. Some of the other developed economies are also easing monetary policies even though there’s very little scope for easing due to low interest rates.

Shanghai Composite Index

The rate cut from the People’s Bank of China was among the factors that supported the Shanghai Composite Index today. The index gained 0.62% today and is trading flat for the month. Notably, the Shanghai Composite Index has underperformed US market indices like the Dow Jones this month. Looking at the year-to-date price action, the Shanghai Composite Index has risen 16.7%.