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Macroscope
OpinionComment
David Brown
David Brown

Macroscope | Why the next move for China’s interest rates should be up, not down

  • The economic slowdown is consistent with longer-term trends of GDP stabilising to a more sustainable 6 per cent growth
  • There’s no need for Beijing to panic – it has done enough and anyway can ill-afford to cut rates just when the Fed is expected to tighten policy

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Visitors to a store in the Nanluoguxiang shopping area in Beijing have their temperature checked on August 8. The general outlook seems compatible with the Chinese economy stabilising into a 5.5 to 6.5 per cent growth range, once output volatility settles down. Photo: Bloomberg
David Brown
This is not the moment for China to cut interest rates. With the US Federal Reserve looking likely to tighten monetary policy fairly soon, it’s safe to say that China has already reached the bottom of its easing cycle and the next move should be a switch to a tightening bias over the future.
The mainland economy may be slowing but it’s just a natural phase of normalisation after the stellar burst of economic expansion from the low point of the Covid-19 crisis, which struck China so hard in the early part of 2020.

China’s economic growth rate should be stabilising at around 6 per cent in the next few years, inflation pressures should moderate and Beijing would be sending the wrong signal by cutting interest rates again while domestic credit expansion is already growing too fast for official comfort. China needs to sit tight and wait for the global recovery to get into a better gear.

There is no need for Beijing to panic. Growth in industrial production might have slowed to 6.4 per cent in July, but this seems much more sustainable in the long run than the eye-popping 35.1 per cent year-on-year rate of expansion witnessed in February, as the economy sprang bank to life after the lockdowns and factory shutdowns last year.
People walk past an advertising billboard on a pedestrianised shopping street in Beijing on August 18. Annual retail sales decelerated to 8.5 per cent in July, in line with the medium-term goal for more sustainable domestic demand growth. Photo: AP
People walk past an advertising billboard on a pedestrianised shopping street in Beijing on August 18. Annual retail sales decelerated to 8.5 per cent in July, in line with the medium-term goal for more sustainable domestic demand growth. Photo: AP
Similarly, annual retail sales growth has decelerated to 8.5 per cent in July from a peak of 34.2 per cent year on year in March. This is also more consistent with sustainable domestic demand growth over the medium term. It would be wrong to straight-line the trends and construe that the economy was heading for the crash barriers again.
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