For the second time in only two months, the People’s Bank of China (PBOC) has cut interest rates. Clearly, the authorities in Beijing are eager for China to regain its economic momentum, but this gesture on interest rates is little more than just a gesture.
The cuts are too small to have any appreciable effect on economic activity. Even if they had been much bolder, monetary action isn’t what China needs. Instead, China’s economy demands remedies for the policy mistakes of the past three years or more—mistakes that have destroyed the confidence of Chinese households and private businesses, large and small. It’s then sad that Beijing seems not even to know what’s needed and, even if it did, is unable to take the necessary steps.
Beijing’s partial awakening to the economy’s needs seems to have begun in January when the authorities at last abandoned the severities of its zero-COVID measures. For a brief while early in the year, China seemed to respond well, but by spring, growth momentum began to fade again. In response, the authorities instituted a program of infrastructure spending scheduled to unfold over months. In addition, they had the PBOC cut interest rates in June to induce consumers to save less and spend more and to inspire private businesses to borrow and invest for expansion. The bank lowered the 1-year loan prime rate and the 5-year rate each by 0.10 percentage points to 3.55 percent and 4.20 percent, respectively. This had no appreciable effect. In August, the PBOC took even more timid action. It has cut only one rate to bring the prime loan rate down to 3.45 percent.
Even if the PBOC had acted more aggressively, it’s far from apparent whether China’s economy would have responded. Much of the private economy—households and businesses—suffers from a severe crisis of confidence that makes all unwilling to take risks or extend themselves in any way, much less to make plans for investing in business expansions.
Part of this problem has grown out of the burdens imposed for years by Beijing’s zero-COVID strategy. Its seemingly arbitrary but nonetheless severe quarantines and lockdowns destroyed business plans and instilled an uneasiness about whether they could even secure a regular income. At the same time, the collapse of the residential property market has depressed real estate values, the quintessential asset for most Chinese. Home prices had fallen for 16 straight months up to December 2022, and though they seemed to stabilize earlier this year, they began to fall again in spring.
Against such burdens, it will take more than a modest interest rate cut to induce people and managers to become more aggressive about spending and expansion. But there’s still more holding back China’s economy. Beginning in 2021, Chinese leader Xi Jinping—perhaps out of conviction or perhaps in response to the fawning coverage given him by Western media outlets—began to talk about recapturing China’s Marxist principles.
He said that the less-Marxist past under his immediate predecessors was needed to catch up, but now that China had established itself, it could return to those roots. If this weren’t enough to make private businesspeople wary, he went on at the time to accuse them of bad faith for following profit opportunities instead of the Communist Party’s agenda.
Now that he can see the need for private business investment and expansion, he has changed his tune, referring to private business and Chinese entrepreneurs as “our own people.” But households and businesses both remain wary, the former saving instead of spending and private businesses actually cutting back on their capital spending during the past year.
Clearly, Beijing needs to do more. The PBOC should make more substantial interest rate cuts, and other authorities in Beijing, including Mr. Xi, need to offer businesses assurances that the authorities won’t turn on them again at a later date. It will take a commitment to allow businesses to follow the business opportunities that they see in the marketplace, not those of a centralized plan made in Beijing.
Such a change will take more imagination than Beijing’s policymakers have ever exhibited. Indeed, such a change would seem to counter Beijing’s DNA. In the meantime, China’s economy remains a bad bet.
