Analysts are reading a lot into the PBOC’s recent reduction of its prime lending rate. Gordon Chang, for instance, sees desperation. Chang says lower rates are a reaction to slower growth, and also – in aiding state owned enterprises – a setback for reform. Jeremiah takes a longer view, looking at growth trends and currency values among China’s trading partners.
Long term, China needs to rebalance its economy more toward domestic consumption. This will stabilize Chinese society by sharing the proceeds of economic success more broadly. It will also give Chinese producers a new market, free of export costs and currency risk.
The obvious way to do this is to allow the Yuan to appreciate, at a measured pace, exactly as China’s trading partners have requested. This will allow America to rebalance more toward production – although we will first have to end our obsession with consumerism. Here is a chart of the Yuan’s ongoing rise versus the dollar.
In the shorter term, however, the Yuan is in the crossfire of a currency war. Try running that chart for the Euro, or the Yen. You may be sure the Yuan will continue to appreciate, but it may be in the relative sense of “less aggressively debauched.”
So, the PBOC cuts rates to keep up (down) with the neighbors. They are also liberalizing rates, allowing them to rise for ordinary savers. This stands in contrast to Europe’s lunatic policy of charging people to keep money in the bank. Lost in the news over China’s lending rate, is this rise in the deposit rate.
As Shaun Rein writes in The End of Cheap China, the impact of China’s rebalancing will be sharply inflationary for America. Not only will we not have cheap goods coming over here, but we will have to bid against a growing Chinese consumer class.
Jeremiah sees a nice symmetry here. In the 1970s, when America was struggling with inflation, we began importing cheap goods from Asia. Now, we will import inflation, which is just what the Keynesian doctors have ordered. Be careful what you wish for.