China’s Monetary-Policy Surprise

NEW HAVEN – In economic policy, as in most other areas, actions speak louder than words. By cutting its benchmark policy interest rates on November 21, the People’s Bank of China (PBOC) has underscored the tactical focus of the government’s stabilization policy, which aims to put a floor of around 7% on GDP growth.

Achieving this goal will be no small feat. China’s economy is caught in the crossfire of structural and cyclical headwinds. Structural pressures have arisen from the shift to a new model of services- and consumer-led growth, and cyclical pressures stem from a tough global environment that has put downward pressure on the old model of export and investment-led growth.

The cyclical challenges, in particular, are proving to be more vexing than anticipated. Though exports have declined considerably from their pre-crisis peak of 35% of GDP, they continue to account for about 24%, leaving China exposed to the global growth cycle – especially to markets in the developed world, where demand is exceptionally weak.

Indeed, 42% of Chinese exports go to Europe, the United States, and Japan – three economies that are flirting with secular stagnation. And Europe, China’s largest export market, has struggled the most.