Beijing considers its growth target acutely jeopardized, despite only being five percent – downright modest by Chinese standards. In order to give the economy a strong boost, Beijing has launched a stimulus package that draws on its usual toolbox: extensive interest rate cuts, new property purchase incentives and attractive offers for stock investments.
Such massive state intervention in the economic system serves as an indicator of the economic challenges China is facing, writes Marcel Grzanna in his analysis. But will it also lead to the desired success in the long term? Opinions are divided.
However, China also invests sustainably by subsidizing advanced technologies such as bi-directional charging. The first pilot projects are already underway, showing what may be possible. Used as secondary battery storage, parked cars could relieve the load on the power grid and provide electricity with their battery charge during subsequent peak loads.
Electric car manufacturer NIO is already making use of its battery exchange stations to save on electricity prices through clever energy management. However, an integrated system where all car owners can participate is still a distant dream. Christian Domke-Seidel has taken a look at the current status of the technology in China.
Have a nice day.
Extensive interest rate cuts, new incentives to buy property and attractive stock investment offers – the Chinese central bank (PBOC) responded on Tuesday with a wide range of measures to address the persistent economic problems in the country’s second-largest economy.
The government in Beijing, which controls the Central Bank, sees this year’s growth target acutely jeopardized and therefore resorts to a popular remedy: stimulus. Ever since the 2008 financial crisis, when China put together a huge investment package, the state’s massive interventions in the economic cycle have been regarded as an indicator of the economic challenges China is facing.
Due to the many problem areas, reactions were also divided. “Cutting mortgage and loan interest rates will lead to immediate and noticeable relief for consumers. However, it remains to be seen to what extent these measures alone will be enough to regain lost trust in the long term,” Ralph Koppitz from the consulting firm Roedl & Partner told Table.Briefings.
Economist Alicia García-Herrero also believes that the package is only good news on the surface. In her opinion, “the stimulus only alleviates the most severe symptoms while structural problems remain,” García-Herrero told Table.Briefings. With it, there is the risk of drastically lower growth figures over the next ten years.
All the problems China’s economy has experienced in the wake of the Covid pandemic can be boiled down to one figure. 5.0 percent growth is the comparatively modest target for an economy that is on a steady decline after decades of boom and wants to avoid a crash. The figure is relevant to China because it has many social implications that are directly related to the legitimization of the Communist Party’s power monopoly.
First and foremost is the dramatically rising youth unemployment rate, putting more and more pressure on the government. To a certain extent, the stimulus thwarts the necessary investment in future-oriented professions and the necessary education programs. After all, the Central Bank’s measures are focused on the usual sectors: construction, the stock market and the lending business.
“Once again, new debt is the primary remedy. However, more money does not necessarily create more confidence among the Chinese population,” says Gero Kunath from the Cologne Institute for Economic Research. “The measures can have enormous long-term costs, they reduce the Chinese government’s scope for action in the event of potential crises and increase the risk of loan defaults.”
In fact, the PBOC repeatedly uses the same monetary policy reflexes to deal with its problems. The new PBOC director Pan Gongsheng, who has been in office for just over a year, also uses the same toolbox as his predecessors. Pan announced that the Central Bank will cut the amount of cash banks must hold as reserves by 50 basis points. This means that banks can draw on their reserves and pump an additional one trillion renminbi (€128 billion) into the economy through loans. Additional cuts to the minimum reserve are in the cards to increase liquidity further.
Next up, the property market: Interest rates for existing mortgages will be cut by 50 basis points and the minimum down payment for houses and flats will be lowered by 15 percent. The aim is to encourage consumers to buy a home again. Since its peak in 2021, China’s property market has been in a downturn. Several property developers have gone bankrupt, leaving behind large stocks of unwanted homes and unfinished projects. However, comparable incentives have not yet borne fruit. On the contrary, the fall in residential property prices in August was the sharpest in over nine years.
The aversion to new property is symbolic of the consumer climate in China. “The simmering property crisis is creating further uncertainty, as it is estimated that up to 70 percent of Chinese households’ savings are invested in property. Their current loss in value is therefore directly affecting the financial stability of many Chinese people,” says Kunath. The weak domestic demand is partly the result of the experiences that many households had during the Covid pandemic when many households had to accept a loss of income and compensate by drawing on their savings. “However, it is questionable whether the more favorable credit conditions will stimulate demand. Chinese households are already carrying a high debt burden and have recently been very cautious – and not just in terms of loan demand,” says Kunath.
The Central Bank also hopes that positive financial market developments will provide momentum. A so-called swap program, initially worth 500 billion yuan, is supposed to give funds, insurers and brokers easier access to financial resources to use this money to buy shares. The second instrument provides commercial banks up to 300 billion yuan in preferential PBOC loans for purchasing and buying back shares in other companies.
The stock markets responded largely positively to the measures. However, financial expert García-Herrero believes that a trend reversal is unlikely. She sees the persistent pressure on Chinese government bonds as an indication of this, as their yields have fallen well short of expectations this year despite early intervention by the Central Bank. “This is a clear indication that investors are suspicious,” says financial expert García-Herrero.
Electric vehicles as energy storage: This is the charming vision being worked on by the National Development and Reform Commission (NDRC). The idea is for EVs to supply electricity to the grid at peak times and, ideally, recharge their own batteries when the grid is oversupplied.
But the reality is still different. Electric cars have large batteries and spend most of the day standing unused in a parking lot. Thanks to bidirectional charging, the vehicle battery can be used during this time to store excess capacity and draw on it when shortages occur. The Chinese government considers this a key component of the country’s energy transition, is driving forward corresponding trials and wants to introduce uniform standards by 2025 – a central challenge.
In January 2024, the National Reform Commission (NDRC) and the National Energy Authority issued new guidelines. The authorities require the technical standards to be formulated by 2025 in order to implement an overall system by 2030. Of course, the industry needs to conduct trials first – a total of 50 are already underway. Anhui Province and the city of Chongqing, among others, have responded to the call and launched corresponding pilot projects.
Some 1,400 NEV vehicles are also taking part in a test in Shenzhen. If the cars are connected at peak times, they feed electricity into the grid. In return, the drivers receive discounts for other hours of the day. Trials were already conducted in January in the industrial area of Wuxi, not far from Shanghai. A total of 50 electric cars were connected to charging stations simultaneously in order to feed power into the grid. CCTV reported that they fed around two megawatts of electricity into the grid within 30 minutes – enough to cover the daily needs of more than 100 households.
Due to the rapid industrial development in recent decades, the Chinese power grid has reached its limits in many parts of the country. Rationing has occurred in some places. Feeding back the energy from the batteries could provide valuable relief. For example, NIO’s battery swap stations had already provided selective support during widespread power outages in the summer of 2022 caused by overloads.
Shenzhen plays a pivotal role in the planning process for two reasons. Firstly, the region has a particularly high share of NEVs. Six out of ten new cars registered here have an electric motor and around one million NEVs are already registered. Power grid operator China Southern Power Grid estimates these cars have a storage potential of around 50 gigawatt hours (GWh). If this energy could be managed, around three gigawatts would be permanently available. This is equivalent to the output of five medium-sized coal-fired power plants.
Energy management is the second reason why Shenzhen is so important. The city has an energy coordination and management system – a so-called virtual power plant. It controls the energy supply by coordinating power sources (e.g., power plants and solar systems), electric vehicles, large power storage units, charging stations and battery swap stations. The tests will also show if and how this technology is scalable.
This vehicle-to-grid technology (V2G) is an enormous challenge for several reasons. Foremost, the technical aspects. Electric cars run on direct current (DC), while households use alternating current (AC). This means that the wall box or the car’s onboard charger must be equipped with a rectifier to charge the battery. However, to feed the electricity back into the grid, it has to go the other way round, which requires an inverter.
Very few cars available are technically capable of this. NIO cars are capable of V2G. BYD also advertises this, but its sales focus is on vehicle-to-load (V2L) technology. The NEV battery serves as a mobile power bank and the driver can connect electrical devices via corresponding outputs. However, this does not allow the battery to be fed back into the grid.
The reason for the limited availability is that the technology offers no direct benefit to customers or manufacturers. Neither the technology nor the legal regulations are advanced enough to be lucrative for car owners. The financial benefits are too small, and many fear the battery’s service life, which would suddenly have to complete significantly more charging cycles. According to Chinese legislation, a battery must last 1,000 charging cycles without significant degradation. However, the China Association of Automobile Manufacturers (CAAM) estimates that a battery with V2G technology would be charged and discharged five times more frequently. This means manufacturers would have to use better and more expensive batteries or swap them out more often. On top of this, the costs for wall boxes and software would be higher.
The regulatory situation in China is also still in its infancy. The electricity market has different requirements in the different regions – simply feeding electricity into the grid is by no means allowed or possible everywhere. However, the current trials serve to define practical standards and regulations in order to implement them in the next step. In the long term, manufacturers may have no choice but to install V2G technology.
Apart from the public power grid, the biggest beneficiary could be NIO. The manufacturer aims to operate 3,310 battery swap stations in China by the end of 2024 (From around 2,400 at the beginning of the year). Shen Fei, Vice President at NIO, announced on Weibo that his company saved around 17 million dollars in electricity costs last year thanks to intelligent energy management – feeding at peak times and charging when there is an oversupply.
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
Monetary policy may often seem unspectacular to many Western observers, but we are currently in a phase where central banks draw a lot of attention: Market participants closely follow the interest rate decisions of the US Fed or the European ECB, hoping that the central banks will take appropriate measures to both keep inflation in check and support slowing growth in the US and the eurozone.
Every statement and every data point is analyzed in detail. But how often do people anticipate a meeting of the People’s Bank of China (PBoC)? Probably never. However, the lack of interest in the world’s second-largest economy is not only due to a general Western reluctance towards China, but also has structural reasons. Unlike other major central banks, the PBoC does not follow a fixed, predictable meeting cycle. Monetary policy decisions are made ad hoc and communicated via press releases. In this respect, the limited interest in PBoC meetings is quite understandable.
However, this should not give the impression that monetary policy cannot benefit the Chinese economy – on the contrary: The PBoC urgently needs to act, as the Chinese economy is currently experiencing a significant downturn. Unlike the previous double-digit growth rates in gross domestic product (GDP), growth has now slowed to around five percent and there are signs of a further decline. This year, we expect GDP growth of 4.9 percent, albeit with considerable downward risks.
From 2025, growth could fall to just 3.7 percent. This development is partly due to expected economic effects such as the Law of Diminishing Marginal Returns, which states that additional capital investment always yields lower returns – from a high base, growth is simply slower. However, structural problems are also weighing on the Chinese economy, such as unfavorable demographics, high corporate and provincial debt and increasing geopolitical tensions, particularly with its trading partner, the USA.
Although the PBoC has only limited control over these long-term challenges, there are acute economic problems that require stronger monetary policy support. These include the ailing property market, destabilized by necessary but rushed regulations, and the Chinese domestic market, which has suffered from a loss of consumer and business confidence since the Covid pandemic. Overcoming the current crisis requires not only regulatory measures to restore confidence, but also targeted monetary stimulus from the PBoC.
However, it would be wrong to say that the PBoC has been standing idly by during the acute crisis in recent years. Compared to established central banks, which usually use a modest number of key interest rates to steer policy, the PBoC uses a variety of interest rates to target different economic sectors. Since the start of the Covid crisis in 2020, the PBoC has taken several significant monetary policy measures: The one-year Loan Prime Rate (LPR), which is essential for businesses and households, was cut from 4.8 percent to 3.85 percent. The five-year key lending rate, which is crucial for mortgage banks and customers, was also reduced from 4.8 percent to 3.85 percent. In addition, the Medium-Term Lending Facility Rate (MLF), through which banks can obtain loans from the PBoC, was lowered from 3.25 percent to 2.3 percent. The Reserve Requirement Ratio (RRR) that banks must hold was scaled back from 13 percent to 10 percent.
Despite these measures, the PBoC’s monetary policy steps can be described as somewhat cautious, given the severity of the economic problems. However, the mostly small interest rate steps of around ten basis points can be partly attributed to strategic reasons: Firstly, the Chinese government deliberately initiated the cooling of the overheated real estate market, which is showing clear signs of a bubble forming. Lowering the key lending rate too much would have counteracted the regulatory efforts to calm the market. Secondly, a larger change to the MLF would have widened the interest rate differential between long-term US and Chinese government bonds and thus intensified the already strong capital flight from China. This would also have had severe consequences for the currency markets. All in all, it is a tricky balancing act for the PBoC.
Nevertheless, the PBoC’s limited capabilities in dealing with the current crises must also be addressed. However, this inability is not necessarily due to a lack of expertise by the Chinese central bankers, but rather to the PBoC’s lack of independence from the country’s political leadership. Even if the monetary authorities had a coherent plan for overcoming the economic challenges, their options are severely curtailed by the government’s political guidelines.
Before any decision on “annual money supply, interest rates, exchange rates or other important monetary policy issues” can be made, the State Council of the People’s Republic, the central administrative body in China, must give its approval. Although the PBoC has always been under the supervision of the State Council, its authority in financial matters has so far been relatively unaffected. However, this independence has been further eroded.
Since March 2023, the PBoC has effectively been under the control of a new supervisory body, the Central Finance Commission, which is directly subordinate to the Communist Party. This development marks a significant loss of power and independence for the PBoC. Beijing is increasingly seeking to centralize the Party’s control over financial regulation. The scope of action of the once-powerful central bank is thus being increasingly curtailed.
China has set itself ambitious political and economic goals for the coming years. The Chinese Communist Party aspires to achieve the “great rejuvenation of the Chinese nation” by 2049, the centenary of the founding of the People’s Republic. A vital component of this vision is to achieve economic superiority over the USA. The US dollar, whose status as the global reserve currency has proven particularly advantageous in times of crisis, is seen as a key element of the USA’s economic dominance to date.
China has been trying to challenge this status for some time. China has stepped up its efforts to reduce the US dollar’s share of global currency trading, particularly since the US sanctions against Russia in the wake of the attack on Ukraine – albeit without much success so far. The US dollar remains the dominant currency in international trade, accounting for 88.5 percent of all transactions (according to the Bank for International Settlements (BIS) 2022), followed by the euro at 30.5 percent. The Chinese renminbi, which currently only accounts for seven percent of global foreign exchange transactions, is growing but still lags behind the currencies of established economies.
China is already taking steps to weaken the dollar’s dominance: Despite the prevailing exchange controls, which pose a problem for the spread of the renminbi, the first currency swaps are being organized with central banks in Latin America, Africa and Asia, as well as an increase of the gold share in foreign exchange reserves. However, to gain an even larger share of global financial flows, China must take significant steps to strengthen the independence and credibility of its currency. This would not necessarily make PBoC meetings more spectacular, but they would become more important.
Tariq K. Chaudhry is a China Economist at Hamburg Commercial Bank and runs the economic podcast “China – der Wirtschaftspodcast.” Chaudhry is also the author of the weekly “China Economic Notes” newsletter on LinkedIn. This article first appeared in HCOB’s “Weekly Editorial.”
Leafy belly, foliated head, bushy brows: A ten-meter-tall panda balances next to a highway in Hangzhou, Zhejiang. The horticultural team that cut it out of greenery clearly cares little for gravity. A shave is probably due in a few days once the bearded ballet dancer begins to sprout branches from his chin, ears and brows.
Beijing considers its growth target acutely jeopardized, despite only being five percent – downright modest by Chinese standards. In order to give the economy a strong boost, Beijing has launched a stimulus package that draws on its usual toolbox: extensive interest rate cuts, new property purchase incentives and attractive offers for stock investments.
Such massive state intervention in the economic system serves as an indicator of the economic challenges China is facing, writes Marcel Grzanna in his analysis. But will it also lead to the desired success in the long term? Opinions are divided.
However, China also invests sustainably by subsidizing advanced technologies such as bi-directional charging. The first pilot projects are already underway, showing what may be possible. Used as secondary battery storage, parked cars could relieve the load on the power grid and provide electricity with their battery charge during subsequent peak loads.
Electric car manufacturer NIO is already making use of its battery exchange stations to save on electricity prices through clever energy management. However, an integrated system where all car owners can participate is still a distant dream. Christian Domke-Seidel has taken a look at the current status of the technology in China.
Have a nice day.
Extensive interest rate cuts, new incentives to buy property and attractive stock investment offers – the Chinese central bank (PBOC) responded on Tuesday with a wide range of measures to address the persistent economic problems in the country’s second-largest economy.
The government in Beijing, which controls the Central Bank, sees this year’s growth target acutely jeopardized and therefore resorts to a popular remedy: stimulus. Ever since the 2008 financial crisis, when China put together a huge investment package, the state’s massive interventions in the economic cycle have been regarded as an indicator of the economic challenges China is facing.
Due to the many problem areas, reactions were also divided. “Cutting mortgage and loan interest rates will lead to immediate and noticeable relief for consumers. However, it remains to be seen to what extent these measures alone will be enough to regain lost trust in the long term,” Ralph Koppitz from the consulting firm Roedl & Partner told Table.Briefings.
Economist Alicia García-Herrero also believes that the package is only good news on the surface. In her opinion, “the stimulus only alleviates the most severe symptoms while structural problems remain,” García-Herrero told Table.Briefings. With it, there is the risk of drastically lower growth figures over the next ten years.
All the problems China’s economy has experienced in the wake of the Covid pandemic can be boiled down to one figure. 5.0 percent growth is the comparatively modest target for an economy that is on a steady decline after decades of boom and wants to avoid a crash. The figure is relevant to China because it has many social implications that are directly related to the legitimization of the Communist Party’s power monopoly.
First and foremost is the dramatically rising youth unemployment rate, putting more and more pressure on the government. To a certain extent, the stimulus thwarts the necessary investment in future-oriented professions and the necessary education programs. After all, the Central Bank’s measures are focused on the usual sectors: construction, the stock market and the lending business.
“Once again, new debt is the primary remedy. However, more money does not necessarily create more confidence among the Chinese population,” says Gero Kunath from the Cologne Institute for Economic Research. “The measures can have enormous long-term costs, they reduce the Chinese government’s scope for action in the event of potential crises and increase the risk of loan defaults.”
In fact, the PBOC repeatedly uses the same monetary policy reflexes to deal with its problems. The new PBOC director Pan Gongsheng, who has been in office for just over a year, also uses the same toolbox as his predecessors. Pan announced that the Central Bank will cut the amount of cash banks must hold as reserves by 50 basis points. This means that banks can draw on their reserves and pump an additional one trillion renminbi (€128 billion) into the economy through loans. Additional cuts to the minimum reserve are in the cards to increase liquidity further.
Next up, the property market: Interest rates for existing mortgages will be cut by 50 basis points and the minimum down payment for houses and flats will be lowered by 15 percent. The aim is to encourage consumers to buy a home again. Since its peak in 2021, China’s property market has been in a downturn. Several property developers have gone bankrupt, leaving behind large stocks of unwanted homes and unfinished projects. However, comparable incentives have not yet borne fruit. On the contrary, the fall in residential property prices in August was the sharpest in over nine years.
The aversion to new property is symbolic of the consumer climate in China. “The simmering property crisis is creating further uncertainty, as it is estimated that up to 70 percent of Chinese households’ savings are invested in property. Their current loss in value is therefore directly affecting the financial stability of many Chinese people,” says Kunath. The weak domestic demand is partly the result of the experiences that many households had during the Covid pandemic when many households had to accept a loss of income and compensate by drawing on their savings. “However, it is questionable whether the more favorable credit conditions will stimulate demand. Chinese households are already carrying a high debt burden and have recently been very cautious – and not just in terms of loan demand,” says Kunath.
The Central Bank also hopes that positive financial market developments will provide momentum. A so-called swap program, initially worth 500 billion yuan, is supposed to give funds, insurers and brokers easier access to financial resources to use this money to buy shares. The second instrument provides commercial banks up to 300 billion yuan in preferential PBOC loans for purchasing and buying back shares in other companies.
The stock markets responded largely positively to the measures. However, financial expert García-Herrero believes that a trend reversal is unlikely. She sees the persistent pressure on Chinese government bonds as an indication of this, as their yields have fallen well short of expectations this year despite early intervention by the Central Bank. “This is a clear indication that investors are suspicious,” says financial expert García-Herrero.
Electric vehicles as energy storage: This is the charming vision being worked on by the National Development and Reform Commission (NDRC). The idea is for EVs to supply electricity to the grid at peak times and, ideally, recharge their own batteries when the grid is oversupplied.
But the reality is still different. Electric cars have large batteries and spend most of the day standing unused in a parking lot. Thanks to bidirectional charging, the vehicle battery can be used during this time to store excess capacity and draw on it when shortages occur. The Chinese government considers this a key component of the country’s energy transition, is driving forward corresponding trials and wants to introduce uniform standards by 2025 – a central challenge.
In January 2024, the National Reform Commission (NDRC) and the National Energy Authority issued new guidelines. The authorities require the technical standards to be formulated by 2025 in order to implement an overall system by 2030. Of course, the industry needs to conduct trials first – a total of 50 are already underway. Anhui Province and the city of Chongqing, among others, have responded to the call and launched corresponding pilot projects.
Some 1,400 NEV vehicles are also taking part in a test in Shenzhen. If the cars are connected at peak times, they feed electricity into the grid. In return, the drivers receive discounts for other hours of the day. Trials were already conducted in January in the industrial area of Wuxi, not far from Shanghai. A total of 50 electric cars were connected to charging stations simultaneously in order to feed power into the grid. CCTV reported that they fed around two megawatts of electricity into the grid within 30 minutes – enough to cover the daily needs of more than 100 households.
Due to the rapid industrial development in recent decades, the Chinese power grid has reached its limits in many parts of the country. Rationing has occurred in some places. Feeding back the energy from the batteries could provide valuable relief. For example, NIO’s battery swap stations had already provided selective support during widespread power outages in the summer of 2022 caused by overloads.
Shenzhen plays a pivotal role in the planning process for two reasons. Firstly, the region has a particularly high share of NEVs. Six out of ten new cars registered here have an electric motor and around one million NEVs are already registered. Power grid operator China Southern Power Grid estimates these cars have a storage potential of around 50 gigawatt hours (GWh). If this energy could be managed, around three gigawatts would be permanently available. This is equivalent to the output of five medium-sized coal-fired power plants.
Energy management is the second reason why Shenzhen is so important. The city has an energy coordination and management system – a so-called virtual power plant. It controls the energy supply by coordinating power sources (e.g., power plants and solar systems), electric vehicles, large power storage units, charging stations and battery swap stations. The tests will also show if and how this technology is scalable.
This vehicle-to-grid technology (V2G) is an enormous challenge for several reasons. Foremost, the technical aspects. Electric cars run on direct current (DC), while households use alternating current (AC). This means that the wall box or the car’s onboard charger must be equipped with a rectifier to charge the battery. However, to feed the electricity back into the grid, it has to go the other way round, which requires an inverter.
Very few cars available are technically capable of this. NIO cars are capable of V2G. BYD also advertises this, but its sales focus is on vehicle-to-load (V2L) technology. The NEV battery serves as a mobile power bank and the driver can connect electrical devices via corresponding outputs. However, this does not allow the battery to be fed back into the grid.
The reason for the limited availability is that the technology offers no direct benefit to customers or manufacturers. Neither the technology nor the legal regulations are advanced enough to be lucrative for car owners. The financial benefits are too small, and many fear the battery’s service life, which would suddenly have to complete significantly more charging cycles. According to Chinese legislation, a battery must last 1,000 charging cycles without significant degradation. However, the China Association of Automobile Manufacturers (CAAM) estimates that a battery with V2G technology would be charged and discharged five times more frequently. This means manufacturers would have to use better and more expensive batteries or swap them out more often. On top of this, the costs for wall boxes and software would be higher.
The regulatory situation in China is also still in its infancy. The electricity market has different requirements in the different regions – simply feeding electricity into the grid is by no means allowed or possible everywhere. However, the current trials serve to define practical standards and regulations in order to implement them in the next step. In the long term, manufacturers may have no choice but to install V2G technology.
Apart from the public power grid, the biggest beneficiary could be NIO. The manufacturer aims to operate 3,310 battery swap stations in China by the end of 2024 (From around 2,400 at the beginning of the year). Shen Fei, Vice President at NIO, announced on Weibo that his company saved around 17 million dollars in electricity costs last year thanks to intelligent energy management – feeding at peak times and charging when there is an oversupply.
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
Monetary policy may often seem unspectacular to many Western observers, but we are currently in a phase where central banks draw a lot of attention: Market participants closely follow the interest rate decisions of the US Fed or the European ECB, hoping that the central banks will take appropriate measures to both keep inflation in check and support slowing growth in the US and the eurozone.
Every statement and every data point is analyzed in detail. But how often do people anticipate a meeting of the People’s Bank of China (PBoC)? Probably never. However, the lack of interest in the world’s second-largest economy is not only due to a general Western reluctance towards China, but also has structural reasons. Unlike other major central banks, the PBoC does not follow a fixed, predictable meeting cycle. Monetary policy decisions are made ad hoc and communicated via press releases. In this respect, the limited interest in PBoC meetings is quite understandable.
However, this should not give the impression that monetary policy cannot benefit the Chinese economy – on the contrary: The PBoC urgently needs to act, as the Chinese economy is currently experiencing a significant downturn. Unlike the previous double-digit growth rates in gross domestic product (GDP), growth has now slowed to around five percent and there are signs of a further decline. This year, we expect GDP growth of 4.9 percent, albeit with considerable downward risks.
From 2025, growth could fall to just 3.7 percent. This development is partly due to expected economic effects such as the Law of Diminishing Marginal Returns, which states that additional capital investment always yields lower returns – from a high base, growth is simply slower. However, structural problems are also weighing on the Chinese economy, such as unfavorable demographics, high corporate and provincial debt and increasing geopolitical tensions, particularly with its trading partner, the USA.
Although the PBoC has only limited control over these long-term challenges, there are acute economic problems that require stronger monetary policy support. These include the ailing property market, destabilized by necessary but rushed regulations, and the Chinese domestic market, which has suffered from a loss of consumer and business confidence since the Covid pandemic. Overcoming the current crisis requires not only regulatory measures to restore confidence, but also targeted monetary stimulus from the PBoC.
However, it would be wrong to say that the PBoC has been standing idly by during the acute crisis in recent years. Compared to established central banks, which usually use a modest number of key interest rates to steer policy, the PBoC uses a variety of interest rates to target different economic sectors. Since the start of the Covid crisis in 2020, the PBoC has taken several significant monetary policy measures: The one-year Loan Prime Rate (LPR), which is essential for businesses and households, was cut from 4.8 percent to 3.85 percent. The five-year key lending rate, which is crucial for mortgage banks and customers, was also reduced from 4.8 percent to 3.85 percent. In addition, the Medium-Term Lending Facility Rate (MLF), through which banks can obtain loans from the PBoC, was lowered from 3.25 percent to 2.3 percent. The Reserve Requirement Ratio (RRR) that banks must hold was scaled back from 13 percent to 10 percent.
Despite these measures, the PBoC’s monetary policy steps can be described as somewhat cautious, given the severity of the economic problems. However, the mostly small interest rate steps of around ten basis points can be partly attributed to strategic reasons: Firstly, the Chinese government deliberately initiated the cooling of the overheated real estate market, which is showing clear signs of a bubble forming. Lowering the key lending rate too much would have counteracted the regulatory efforts to calm the market. Secondly, a larger change to the MLF would have widened the interest rate differential between long-term US and Chinese government bonds and thus intensified the already strong capital flight from China. This would also have had severe consequences for the currency markets. All in all, it is a tricky balancing act for the PBoC.
Nevertheless, the PBoC’s limited capabilities in dealing with the current crises must also be addressed. However, this inability is not necessarily due to a lack of expertise by the Chinese central bankers, but rather to the PBoC’s lack of independence from the country’s political leadership. Even if the monetary authorities had a coherent plan for overcoming the economic challenges, their options are severely curtailed by the government’s political guidelines.
Before any decision on “annual money supply, interest rates, exchange rates or other important monetary policy issues” can be made, the State Council of the People’s Republic, the central administrative body in China, must give its approval. Although the PBoC has always been under the supervision of the State Council, its authority in financial matters has so far been relatively unaffected. However, this independence has been further eroded.
Since March 2023, the PBoC has effectively been under the control of a new supervisory body, the Central Finance Commission, which is directly subordinate to the Communist Party. This development marks a significant loss of power and independence for the PBoC. Beijing is increasingly seeking to centralize the Party’s control over financial regulation. The scope of action of the once-powerful central bank is thus being increasingly curtailed.
China has set itself ambitious political and economic goals for the coming years. The Chinese Communist Party aspires to achieve the “great rejuvenation of the Chinese nation” by 2049, the centenary of the founding of the People’s Republic. A vital component of this vision is to achieve economic superiority over the USA. The US dollar, whose status as the global reserve currency has proven particularly advantageous in times of crisis, is seen as a key element of the USA’s economic dominance to date.
China has been trying to challenge this status for some time. China has stepped up its efforts to reduce the US dollar’s share of global currency trading, particularly since the US sanctions against Russia in the wake of the attack on Ukraine – albeit without much success so far. The US dollar remains the dominant currency in international trade, accounting for 88.5 percent of all transactions (according to the Bank for International Settlements (BIS) 2022), followed by the euro at 30.5 percent. The Chinese renminbi, which currently only accounts for seven percent of global foreign exchange transactions, is growing but still lags behind the currencies of established economies.
China is already taking steps to weaken the dollar’s dominance: Despite the prevailing exchange controls, which pose a problem for the spread of the renminbi, the first currency swaps are being organized with central banks in Latin America, Africa and Asia, as well as an increase of the gold share in foreign exchange reserves. However, to gain an even larger share of global financial flows, China must take significant steps to strengthen the independence and credibility of its currency. This would not necessarily make PBoC meetings more spectacular, but they would become more important.
Tariq K. Chaudhry is a China Economist at Hamburg Commercial Bank and runs the economic podcast “China – der Wirtschaftspodcast.” Chaudhry is also the author of the weekly “China Economic Notes” newsletter on LinkedIn. This article first appeared in HCOB’s “Weekly Editorial.”
Leafy belly, foliated head, bushy brows: A ten-meter-tall panda balances next to a highway in Hangzhou, Zhejiang. The horticultural team that cut it out of greenery clearly cares little for gravity. A shave is probably due in a few days once the bearded ballet dancer begins to sprout branches from his chin, ears and brows.
