A Stimulus for Different Reasons: Understanding the Motives behind the Federal Reserve and PBOC Policies.

By Chinedu Okoye 



Introduction:

The Federal Reserve and People's Bank of China (PBOC) both entered aggressive easing mode in the space of a week.

Though the Fed move was somewhat expected the depth of the cut surprised the markets. The PBOC however was unexpected in magnitude, even though not out of character of the Chinese Monetary Authority.

Both economies have unique problems with similar implications. The US economy has a larger consumer base than China but the Chinese consumer is richer in savings.

Both Central Banks have different motivations for the moves taken as outlined below.



Monetary Policy Actions:

The Federal Reserve on Wednesday 18, September, slashed ite benchmark rates by 50 basis points in a surprise move to the markets alreadh priced in a 25 bps cut. China made a similar aggressive move this week slashing the Seven-day Repo Rates by 20 bps and rescuing required reserve ratio by 50 basis points, a move that is set to release over a trillion Yuan of liquidity.

These monetary policy moves come as both Monetary Authorities aim to stimulate the economy. But they are easing conditions for different reasons. 



Cutting for Different Reasons:

China is cutting to; 
• Boost consumer spending
• Lower mortgage rates to cushion fall in house prices by enabling and encouraging house purchases
• Support businesses and the stock market 

US is easing to;
• Avoid labor market distress 
• Enable consumer spending 
• Support businesses.



Similar motives but different problems:

Both Countries are in full easing monetary policy mode, but for different reasons. 

The monetary easing in both countries have been focused on the strength of the consumer focusing on two different metrics. China is focused on the the confidence of the consumer and the US is focused on the strength of the consumer.

Consumer Confidence in China decreased to 86 points in July from 86.20 points in June of 2024. However the US PCE Index is at all time highs. But the US labor is showing signs of cooling relative to China. Unemployment in China has averaged 4.76% from 2002 to 2024 but currently at 5.3%, US unemployment is lower at 4.3% with signs of softening which prompted the Fed 50bps cut. 



Policy Objectives of the PBOC and the Federal Reserve:

China is trying to get the consumer with a relatively higher savings than their US peers, to spend by increasing their confidence - salvaging the property market to stem a fall in huse prices which tends to affect the overall wealth of the Chinese household. 

The US is trying to strengthen the consumer and businesses by extension with a focus on stabilizing the labor market and reduce the credit burden on the consumer, as PCE Data shows spending at all time highs. 

(US PCE up until June 2024. Source; FRED)



Consumer spending makes up 70% of US Gross Domestic Product. And 53.2% of China's GDP. Savings rate in China as a % total income stood at 44.3% in 2023. This highlights stronger Chinese consumer relative to their American peers, and at prepandemic levels)

(China Gross Savings Rate. Source: ceicdata.com)

In contrast, the US Savings rate stood at 2.9% in March. The chart below shows the US Personal Savings rates eroded by inflation and high interest rates in the past 2 years. 


(US Personal Savings Rate. Source: ceicdata.com)

Consumer spending is high in the US as given by the PCE Chart below but the consumer is not very strong. On the other hand the Chinese consumer is strong (with savings rate at 44.3% in 2023), but soending less as a result.



Zero Equilibrium Take:

The Fed is focused on the strength of the labor market, as the PBOC is focused on increasing consumers willingness to spend. If China can unlock more consumer spending, and the contribution to GDP increases, it would have a positive impact on overall GDP. 

The Chinese consumer tends to save more, and the American consumer saves little or nothing and so is more debt dependent and is at more risk when out of employment.

So, the Fed is trying to support the economy with cheaper rates in hopes of stimulating aggregate demand (for money and other factors of production especially labor).

The PBOC is supporting the property markets and commercial/personal lending with lower rates in a bid to induce more spending. 

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