Wed Sep 25 02:33:15 UTC 2024: ## China’s Economy Needs More Than Rate Cuts: Analysts
**BEIJING -** China’s slowing economy needs more than just interest rate cuts to stimulate growth, analysts warn. The People’s Bank of China (PBOC) surprised markets on Tuesday with an announcement to lower several key rates, including existing mortgages, sending mainland Chinese stocks soaring.
While this move could mark the end of China’s longest deflationary streak since 1999, experts believe that more substantial fiscal support is necessary to achieve meaningful reflation. Larry Hu, chief China economist at Macquarie, highlights the need for increased government spending on housing, financed by the PBOC’s balance sheet.
Despite the rate cuts, the bond market remains cautious. While the Chinese 10-year government yield fell to a record low of 2%, it quickly recovered to 2.07%, still significantly lower than the U.S. 10-year Treasury yield of 3.74%.
Edmund Goh, head of China fixed income at abrdn, stresses the need for increased fiscal stimulus, highlighting the wide gap between U.S. and Chinese bond rates. The divergence in yields reflects differing market expectations for growth in the world’s two largest economies.
Despite the Fed’s recent easing cycle, the gap between U.S. and Chinese yields has continued to widen, indicating a long-term expectation of stronger U.S. growth.
China’s economy grew by 5% in the first half of the year, but concerns remain about meeting the country’s 5% full-year target without further stimulus. The Ministry of Finance has been conservative, maintaining a 3% deficit target despite a rare increase to 3.8% in October 2023.
However, a research report by CF40, a major Chinese think tank, indicates a 1 trillion yuan shortfall in spending if the fiscal target is to be met. The report recommends increasing the deficit and issuing additional treasury bonds to bridge the revenue gap.
PBOC Governor Pan Gongsheng attributes the downward trend in Chinese government bond yields to a slower increase in government bond issuance, indicating ongoing cooperation with the Ministry of Finance on this matter.
Analysts remain cautious about the short-term prospects for the Chinese 10-year government bond yield, expecting it to stay above 2%. Haizhong Chang, executive director of Fitch (China) Bohua Credit Ratings, emphasizes the need for fiscal stimulus to complement monetary easing and effectively stimulate the real economy. He points out the high leverage of Chinese corporations and households, making them reluctant to borrow further and weakening the impact of loose monetary policy.
The Fed’s recent rate cut theoretically eases pressure on Chinese policymakers, weakening the dollar against the yuan and bolstering exports. However, Louis Kuijs, APAC Chief Economist at S&P Global Ratings, calls for more substantial fiscal stimulus, noting slow bond issuance and a lack of substantial fiscal plans.
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