China Faces Policy Balancing Act as Fed Rate Cut Approaches

Gerik

Summary:

China’s central bank confronts a delicate dilemma: stimulate a slowing economy without overheating the stock market. While a U.S. Federal Reserve rate cut could provide Beijing some policy flexibility...

Monetary Policy Dilemma

As the Fed prepares to lower rates next week, China’s policymakers are balancing the need to support slowing growth with the risk of inflating an already active stock market. The People’s Bank of China (PBOC) has limited room for aggressive easing after already cutting the seven-day reverse repo rate by 10 basis points and lowering banks’ reserve requirement ratio (RRR) by 50 basis points earlier this year.

Policy insiders suggest that any further action will be data-dependent, with cautious, incremental measures favored over broad rate cuts. Ting Lu, Nomura’s chief China economist, expects the PBOC to hold off on immediate cuts if the stock rally persists, though modest easing may follow if market sentiment cools.

Economic Headwinds Persist

China’s growth remains uneven. Factory output in July hit an eight-month low, retail sales slumped, and new yuan loans contracted for the first time in two decades. Exports slowed in August as the temporary boost from the U.S. tariff truce faded. The economy grew 5.2% in Q2, but sub-5% growth in the second half of 2025 could still meet official targets.

Employment pressures are rising as traditional sectors continue to underperform, and household savings sit at a record 160 trillion yuan ($22.45 trillion), reflecting consumer caution. Analysts suggest that fiscal measures, particularly housing support, may be required alongside modest monetary easing to avoid a sharper slowdown.

Stock Market Versus Economy

China’s stock rally, led by institutional investors, has been partially fueled by PBOC liquidity support through swap schemes and relending programs. Policymakers hope rising equities can repair household balance sheets and stimulate consumption, but economists warn the direct benefits to broader economic activity are limited.

The PBOC’s policy rate stands at a record low of 1.4%, and the RRR is down to 6.2%, leaving limited room for conventional monetary stimulus. Officials are therefore navigating a tightrope: further cuts risk inflating a market bubble, while inaction could exacerbate growth weaknesses and employment pressures.

China’s central bank is likely to proceed cautiously, using targeted measures to support the economy rather than broad rate cuts, while monitoring both stock market momentum and incoming economic data. Any additional stimulus is expected to be modest and carefully calibrated to balance economic growth with financial stability.

Source: Reuters

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