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China, Japan buck trend, keep interest rates low
Asia's biggest economies refuse to go with global monetary flow amid inflation threats
Daphne Li 17 Aug 2022

While many of the world’s central bankers are busy raising interest rates to curb inflation, the same does not apply to those of China and Japan, which have the second- and third-largest economies in the world after that of the United States.

On Monday, China’s central bank cut its policy interest rate by 10 basis points with the implicit aim of helping to boost the recovery of its economy, which is still reeling from the zero-Covid policy and slowing GDP growth. And in Japan, the other Asian powerhouse, there are manifestly no plans to deviate from its ultra-low interest rate monetary policy that hopes to speed the country's recovery from the Covid-19 pandemic.

China

The People's Bank of China on Monday conducted 400 billion yuan (US$59.2 billion) in its benchmark one-year medium-term lending facility operations at an interest rate of 2.75%, down from 2.85% a month earlier. As well, the bank on the same day lowered the interest rate of seven-day reverse repos from 2.1% to 2% in its 2 billion yuan worth of reverse repo operations, fully satisfying financial institutions' needs.

The rate cut is seen as a sign that the Chinese government is willing to maintain efforts to stimulate the economy despite rising global inflation concerns unlike, say, the US Federal Reserve, which has recently increased its interest rates.

China’s move does not come as a surprise to market participants as it has been foreshadowed by the earlier announced credit and activity data in July, says market research firm CreditSights in a recent report. Monthly data shows that the country’s industrial production growth slowed to 3.8% year on year in July, lagging behind the market consensus of 4.3%. The underperformance was due to a contracting steel and cement output, despite already being partially offset by better automobile production and power generation.

China retail sales growth in July is up 2.7% year on year, falling short of the market consensus of 4.9%. The sluggish movement is due to decelerating automobile sales, which is offset partially by better online goods and catering sales.

Fixed-asset investment also witnessed a decline from 5.9% in June to 3.6% in July, weighed down by property and manufacturing investment. New home starts and completions remain low, and property sales volume in July shrunk around 30% year on year. Infrastructure investment remains resilient, up 12% for the month year on year.

The muted credit demand in July has resulted in a weak growth of yuan new loans and corporate bond net issuance, CreditSights points out. “China's property market has not shown a visible sign of recovery. The transacted area of residential property and land declined by 31% and 48%, respectively in the first two weeks of August compared with the weekly average in July.

“We expect homebuyers' sentiment to continue to be negatively affected by the mortgage boycott saga and most property developers to remain distressed and refrain from land purchases or investments,” it notes. “The sporadic Covid outbreaks and small-scale lockdown measures might drag on the deployment of infrastructure stimulus.” The market researcher also forecasts a further cut on one-year and five-year loan prime rates in August.

Despite the headwinds, a recovery may take place as early as August. Signs like recoveries in steel production and cement shipments, higher year-on-year traffic congestion indices in major cities, and steady volumes of domestic passengers indicate green shoots. Covid lockdowns continue to take place, but mostly away from tier-one cities.

The embattled property market, however, has yet to show a visible sign of recovery. CreditSights expects “homebuyers' sentiment to continue to be negatively affected by the mortgage boycott saga and most property developers to remain distressed and refrain from land purchases or investments”.

Japan

Similarly, Japan continues with its ultra-low interest rate quest amid the wave of policy tightening around the globe. The central bank has stated that it has no plans to raise rates and that it will maintain borrowing costs at “present or lower” levels to support the pandemic-hit economy. The untypical move, however, has pushed the country’s inflation rate to over 2%, with the currency market witnessing sharp declines and new lows in the country's yen. 

The relaxation of Covid curbs on businesses in March has also helped bolster consumer spending and capital expenditure. Japan’s gross domestic product in the second quarter grew at an annualized pace of 2.2%, jumping from a 0.5% contraction in the previous quarter.

Japan’s weak currency and rising inflationary expectations can have a positive impact on the country’s economy and equity market. “First, it makes Japan the most cost competitive it has been since the early 1970s in terms of the real effective exchange rate,” writes Lazard Asset Management in a commentary. A weak yen is a positive for aggregate Japanese corporate earnings, it posits, and rising inflationary expectations could have a meaningful impact on attitudes towards domestic investment and consumption, which still suffers from a deflationary mindset.

Most Japanese companies, the asset manager notes, delivered better-than-expected fiscal year results and maintained a positive outlook despite challenging macro conditions, such as the ongoing war in Ukraine and continued supply-chain disruptions. 

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Inga Kudzmaite
Inga Kudzmaite
regional treasury director, Asia
Carlsberg
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