The whispering campaign has already begun that US monetary policy should be tilting towards
lower interest rates very soon. Once the Federal Reserve moves, other central banks should follow suit and China won’t be too far behind. Global trade tensions have exacted a
heavy toll on the world economy and policymakers need to lay down some positive ground support before it’s too late. The world is staring into the jaws of another crisis and crying out for a new wave of easing.
If St Louis Fed president James Bullard has recently been a stalking horse for lower rates, his message couldn’t be clearer. The fallout between the US and China has been catastrophic for growth prospects and, with Washington
raising trade tensions to new levels with Europe, Mexico and India, the outlook is deteriorating fast. The risks to growth are rising, headline inflation pressures look spent and lower rates may be warranted soon, according to Bullard.
Forward-leading indicators have been pointing this way for quite some time with protracted weakening in US business conditions and some dramatic flattening in the US Treasury
yield curve acting as early warnings to trouble ahead. Bullard might be in the minority right now but the longer the Fed delays easing, the greater the threat to the economy longer term.
Markets are skating on thin ice and another collapse in confidence so soon after the 2008 crash could have grave consequences. The Fed and the major central banks have a duty of care to prevent it happening.
China has nothing to fear from another rate cut. Indeed it could give Beijing a better chance of hitting its 6-6.5 per cent
growth target this year. China needs to muster all its resources to keep the economy working at full strength against the negative tide.
This means easier monetary conditions to keep domestic demand strong, combined with some moderate currency relaxation to help the export sector weather the storm.China’s interest rates probably need to come down by another 1 percentage point, at least, to ward off downside risks to growth. Beijing may be reluctant to cut rates on its own but an early rate cut from the Fed could provide the right incentive to ease again and spur consumer confidence and household spending. With consumer demand accounting for up to
two-thirds of economic growth nowadays, it could breathe much-needed life into the recovery.
China has one of the highest
savings ratios in the world, at around 47 per cent of GDP, compared to a 25 per cent global average, according to the World Bank. It’s an invaluable asset to tap into, but it will take more than rate cuts alone to encourage savers to switch money out of treasured life savings into increased consumer spending.
China’s consumers have a high propensity to save and for very good reason. There is always a strong precautionary demand for savings because of near-term economic risks and job worries. But there is also a longer-term prudential demand for savings to cover the future cost of health care, welfare and retirement.
If Beijing wants consumers to spend more and save less in the long term, it must step up government spending on health, social needs and state pensions to encourage a change in consumer behaviour.
The secular slowdown in the velocity of money circulating around China’s economy in recent years underlines that consumers are being more cautious, risk-averse and resourceful with their savings. It’s a dilemma, especially when Beijing is hoping consumers will be spending more to boost growth.
“Providing for the future” is a major challenge for China’s planners but increasing government investment in the welfare state could be the answer, granting consumers greater freedom of choice.
If China’s consumers feel more upbeat about the future, the propensity to spend more and save less will build over time. It’s the logical next step in Beijing’s aim to reorient the economy towards stronger, self-sustaining and domestic-led growth over the future.
David Brown is chief executive of New View Economics
This article appeared in the South China Morning Post print edition as: China can benefit if the Fed decides to cut interest rates
