Simply put, China’s economic recovery has been unbalanced.
As Bloomberg reports, manufacturing is holding up, thanks to resilient overseas demand and Beijing’s efforts to cushion the blow from US trade restrictions by developing advanced technologies at home.
But Chinese consumers have been slow to recover their appetite for spending, amid a prolonged real estate downturn that’s weighing on household and business confidence.
Factory prices have been in deflation for more than a year, reflecting anemic domestic demand.
The central bank on Monday kept the rate of its one-year medium-term lending facility unchanged, and drained cash on net from the banking system via the tool for a second straight month. The PBOC cut its reserve requirement ratio for banks by 50 basis points in February – a move that allows extra lending – and said there’s room for more cuts.
But China has reasons to be cautious in any monetary easing, since widening the yield gap with the US risks adding to downward pressure on the yuan, which is weakening after the data…
Notably, China unexpectedly weakened its yuan defense as pressure from a resurgent dollar and poor sentiment pressured it toward a policy red line. Specifically, the PBOC set a weaker daily reference rate for the managed currency, implying some flexibility for it to depreciate alongside regional peers amid broad strength in the dollar.