Economic Policy Divergence
As global markets brace for the upcoming talks, the People’s Bank of China (PBoC) took steps to bolster China’s economy on Wednesday, May 7, cutting interest rates and lowering the Reserve Requirement Ratio (RRR).
East Asia Econ remarked:
“China – the PBC won’t have finished yet. The exact timing of monetary easing can vary, but today’s interest rate and RRR cuts are not a surprise. Today’s moves are consistent with the PBC’s usual reaction function, and with inflation so weak, further loosening should be expected.”
The rate cuts followed softer-than-expected April PMI data, reflecting the early effects of the trade war on China’s economy. Brian Tycangco, editor at Stansberry Research, commented:
“Beijing just did what we were all hoping and anticipating for… MORE STIMULUS via lower rates and RRR cuts to unleash a tidal wave of liquidity just as the economy starts to feel the impact of Trump’s trade war. To have the release of stimulus coinciding with potential trade talks between the US and China next week is something to be optimistic about. Deal or no deal, Beijing has made steps to shore up its domestic economy.”
In contrast, the Fed held interest rates steady at 4.5% on May 7. Chair Powell signaled a ‘wait-and-see’ policy stance amid increasing stagflation risks. President Trump may view the Fed’s inaction unfavorably, particularly in the context of trade negotiations.
Peter Schiff, Chief Economist and Global Strategist at Europac, commented:
“Reading between the lines here’s what Powell said. We’re in a lot of trouble. The economy is weak and getting weaker, but the Fed can’t cut rates as inflation is getting stronger. In fact, we should be hiking rates, but we can’t do that either without creating a financial crisis.”
Stimulus and Trade Optimism Lifts Markets
Hong Kong and mainland China equities gained ground on Thursday, May 8, buoyed by Beijing’s stimulus and optimism surrounding the trade talks. The Hang Seng Index rose 0.72% after gaining 0.13% the previous session. The CSI 300 and the Shanghai Composite Index climbed 0.61% and 0.80% in morning trading after Wednesday’s gains of 1.01% and 1.13%.
Despite this week’s gains, the CSI 300 and Shanghai Composite Index remain down 2.62% and 0.27% year-to-date. In contrast, the Nasdaq Composite rose 0.27% on May 7, but is down 8.14% for the year, giving Mainland China’s markets an edge ahead of trade talks.
