'Small Cut in Base Interest Rate' China Hesitates on Large-Scale Economic Stimulus: Three Reasons

①Side Effects Such as Renminbi Weakness
②Debt-Led Growth Avoidance Policy
③Policy Operation Limits Amid 'Mixed Crisis'
Small Rate Cut... Citi Also Lowers China's Growth Rate to 4% Range

After the People's Bank of China cut the benchmark interest rate, Citigroup lowered its annual growth forecast to the 4% range. This move is seen as a passive response that fails to alleviate growing concerns over China's economic crisis. Analysts suggest that the Chinese government is reluctant to introduce bold stimulus measures due to worries about the aftermath of large-scale economic stimulus, such as yuan depreciation and fiscal deficits.

[Image source=Yonhap News]

On the 21st (local time), Citigroup revised down its forecast for China's annual economic growth rate in 2023 from 5.0% to 4.7%. Following major global banks like JP Morgan, Barclays, and Morgan Stanley, which had already lowered their annual growth forecasts for China to below 5%, Citigroup also made an additional adjustment.

Citigroup lowered its forecast immediately after the People's Bank of China cut the benchmark interest rate the day before, citing "policy disappointment." The People's Bank of China reduced the one-year Loan Prime Rate (LPR), which serves as the benchmark interest rate, from 3.55% to 3.45%, a 0.1 percentage point cut. This move came amid rising concerns that the Chinese economy would fall into a recession due to deflation and defaults by real estate companies. The cut was the first in two months. However, the cut was smaller than experts' expectations of a 0.15 percentage point reduction, leading to disappointment in the market, which had hoped for more aggressive stimulus measures.

The reasons why the Chinese government has yet to introduce strong stimulus measures despite market concerns include the side effects of large-scale stimulus such as yuan depreciation and the policy stance of President Xi Jinping, who avoids debt-driven growth.

If Chinese authorities significantly lower interest rates to stimulate the economy, the already weak yuan could depreciate further. The yuan has fallen about 5% against the dollar since the beginning of this year. Continued yuan weakness due to interest rate cuts could accelerate the outflow of "China money."

There is also an assessment that China’s economy is caught in a "mixed crisis," limiting the scope of policy options. It is described as a "whack-a-mole" dilemma where solving one problem triggers another. For example, in the case of real estate defaults, if the Chinese government rescues one company, moral hazard could lead to a chain of debt defaults. With the Chinese stock market already criticized for overinvestment and being in an "overhang" state (accumulated potential sell-off volume), if authorities attempt to boost the stock market, it could inflate asset bubbles by pushing stock prices beyond their intrinsic value. One foreign media outlet noted, "The old playbook for economic response, which was effective when China was less developed, had less leverage, and was less vulnerable to asset bubbles, no longer works. Chinese policymakers are unknowingly participating in a whack-a-mole game."

President Xi’s strong desire to move away from a debt-based growth model is also cited as a reason why China avoids large-scale stimulus. Xi advocates for qualitative growth led by a new economy encompassing advanced technologies such as semiconductors, electric vehicles, and clean energy, rather than speculative real estate construction and opaque subsidy payments. Accordingly, he has focused on managing the fiscal deficit within 3% of GDP. However, Bloomberg News forecasts that if political dissatisfaction with Xi grows, China could shift to bold stimulus measures, similar to the sudden lifting of COVID-19 lockdowns at the end of last year.

This content was produced with the assistance of AI translation services.