Yukon Huang, Isaac B. Kardon, Matt Sheehan
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Downturn in China
The cut in China’s bank reserve ratio by 50 basis points signals that the risks of a major economic slowdown are now of greater concern to Beijing than an overheated economy.
Two things have changed to accelerate the timetable. The seemingly intractable financial crisis in Europe has convinced the leadership that the consequences could be much worse than envisaged. But politically more alarming, reports of dramatic falls in exports and its impact on firms in Guangdong have raised the prospect of labor unrest.
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While further monetary relaxation is likely, China has less flexibility in using either interest or exchange rate adjustments to support its objectives. Deposit rates remain strongly negative. Ironically, at a time when the United States is putting pressure on China to let the renminbi appreciate, the concern now is that exports are falling too fast. While market forces might suggest a stable or even depreciating exchange rate, China could feel uncomfortable diplomatically in deviating from its stated intentions for a gradual appreciation.
Beijing may be forced to resort to fiscal policies to deal with downside risks this time around, even though budgetary options are far more cumbersome to work with.
This answer is adapted from an op-ed, China’s new fears of a downturn, published by the Financial Times on December 1.
About the Author
Senior Fellow, Asia Program
Huang is a senior fellow in the Carnegie Asia Program where his research focuses on China’s economy and its regional and global impact.
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