At the conclusion of 2019—the Chinese zodiac Year of the Pig—China was facing economic pain arising from none other than pigs.
The CPI figures were eight-year highs for China. And food prices weren’t the only culprit; consumer goods increased more than 6 percent as well.
While pork supply constraints appear to be easing, in part due to the central government opening its national pork reserve, the crisis is still causing anxiety in Beijing. The Lunar New Year holiday is especially early this year, to be celebrated at the end of January, and pork is typically a mainstay at dinner tables.
Shades of StagflationThe combination of high inflation and low economic growth—China recorded its worst GDP growth in nearly 30 years—is an eerie reminder of stagflation. The United States experienced degrees of stagflation throughout the 1970s, with inflation soaring into the mid-teens, high unemployment, and low economic growth.
But privately, CCP leaders seem more worried. Premier Li Keqiang spoke to government officials of “downward pressure” in 2020, during a speech in late December in Beijing. According to a statement released by the State Council, Li mentioned greater complexities facing China, saying that governments at every level will have a more difficult task going forward, without elaborating on specifics.
Behind the scenes, CCP officials likely recognize that economic growth isn’t as rosy as the official statistics. There’s likely also a lingering concern that price inflation may have some durability.
Stimulus Keeps Coming, but More NuancedThe People’s Bank of China (PBoC) said in November 2019 that keeping inflation modest was a key goal even as it battles to keep economic growth rising. The central bank’s job will become an increasingly difficult one in 2020.
The CCP must tread carefully. Many stimulus measures designed to boost economic growth have the side effect of worsening inflation and elevating the risks of social instability.
Part of the reason for the RRR cut is to inject liquidity into the economy leading up to the Lunar New Year, a period of greater demand for cash.
The central bank recently announced another under-the-radar change intended to spur growth. PBoC in early January mandated that banks must utilize the so-called Loan Prime Rate (LPR) as the reference point for giving out loans.
Currently, the one-year LPR sits at 4.15 percent. Previously, loans were pegged to the central bank’s one-year benchmark lending rate as a reference, which hadn’t moved since Oct. 2015 and is at 4.35 percent.
Banks do have leeway to add or subtract from the LPR to mirror the risk of individual loans.
But by amending the reference point to a slightly lower rate, the PBoC has, in effect, cut borrowing rates without officially announcing it as a rate cut.