That’s the worry set off by the announcement last week by the People’s Bank of China that it would cut the reserve requirement for China’s big banks by 50 basis points. While economists had been expecting the move from the People’s Bank, they weren’t expecting such as large cut so soon. Which has led to fears the the People’s Bank moved so aggressively because China’s growth rate is slowing.
Data on second quarter GDP is due to be released on Thursday and economists are expecting that growth in the quarter slowed to 8% from the record gain of 18.3% in the first quarter, according to a Bloomberg survey of economists. Growth in retail sales, industrial production, and fixed asset investment is expected to moderate too.
A cut in the reserve ratio has the effect of freeing up billions that banks can use to make new loans. That, in turn, can act to stimulate the economy.
One of the puzzle’s in Chinese economic data is why retail sales continue to be “soft” even though the pandemic is under control. Economists are projecting that retail sales slowed again in June.
The action by the People’s bank has two important implications.
First, any slowdown in China’s growth will mean less demand for commodities is is likely to lead to lower prices for oil, copper, aluminum and more. That in turn would lead to a slower rate of global inflation and be another hit to developing economies that have been struggling recently.
Second, the rate at which China’s recovery peak returns to a period of lower sustained economic growth could be (and likely is) and indicator of what economies that were slower at getting the pandemic under control can expect. One of the huge questions confronting U.S. investors, for example, is how quickly earnings growth slows from the near 65% year over year growth projected for the second quarter here.
With stocks trading at another record high today, I find it hard to think of a more important question that “At what rate will earnings and economic growth decline from the likely second quarter peak?