China’s hasty rate cut signals trouble ahead for Asia’s 2023

Add officials at the People’s Bank of China to the list of those disappointed by China’s post-COVID-19 reopening boom. 

On June 13, PBOC Governor Yi Gang surprised the globe with the first interest rate cut since August 2022. Though a modest move — the seven-day reverse repurchase rate was trimmed by 10 basis points to 1.9% — the signal was crystal clear: hitting this year’s 5% growth target is an increasingly uphill battle. 

That message probably fell with as mighty a thud at Bank of Korea headquarters as anywhere. 

There, Governor Rhee Chang-yong has been plenty busy warning about growing risks at home. In particular, rising real estate loan delinquencies. Already, this dynamic is complicating Rhee’s ability to devise what he calls a “sophisticated policy response” to manage inflation risks and cracks in Korea’s underlying financial system. 

Yet China’s underwhelming return from the pandemic trauma of the last three years ups the stakes at the BOK — and for President Yoon Suk-yeol’s broader economic restructuring hopes.

Here, Korea is emblematic of how everything Asian policymakers were sure they knew about 2023 is going sideways. 

Back in January, the conventional wisdom was that a powerful jump in Chinese growth would help the region make up for lost economic time. Instead, the chatter now is about deflation risks as factory-gate prices go negative. Chinese consumer prices are on the verge of contraction. 

Part of China’s problem is cratering exports. Overseas shipments from Asia’s biggest economy plunged 7.5% in May from a year earlier. Even though the U.S. recession many economists were certain would arrive hasn’t, global demand trends are complicating China’s year. Europe is, at best, walking in place.

The bigger problem for Korea, and Asia more broadly, is the other side of China’s trade ledger. Imports fell 4.5% in May, dampening hopes that post-pandemic “revenge spending” by 1.4 billion Chinese would propel Asian growth sharply higher.

Instead, the Chinese yuan is weakening and sending additional signals to Rhee’s team at BOK headquartersv. No matter how much shopping revenge might be in the heart of the average mainland consumer, Chinese purchasing power is waning.

That has PBOC Governor Yi’s team on edge. Until this week, officials in Beijing relied of minor liquidity tweaks to support domestic demand. But cuts to banks’ reserve requirement ratios and targeted bond purchases clearly weren’t enough. 

Odds are, the PBOC will continue to cut benchmark rates. Yi’s team has three overriding objectives. One, boosting business and household confidence. Two, easing strains in a troubled property sector. Three, ensuring that China avoids a Japan-like deflationary funk. 

Yet Yi’s options are rather limited, and he knows it. The lower the PBOC ratchets rates, the more the yuan weakens past 7 to the U.S. dollar. Not only will that anger Washington, but it might prod officials in Seoul and Tokyo to engage in a race to the bottom on exchange rates. 

This dynamic means, too, that China’s post-pandemic revival, limited as it is, might benefit domestic brands more than Samsung, Hyundai, SK or the range of K-beauty products and K-pop content. 

China has another problem: the risk of defaults among giant property developers as dollar-denominated debts become harder to pay. The last thing the PBOC wants is for “China Evergrande” to top the search-engine rankings once again. 

Yi’s plight speaks to Xi Jinping’s failures as a reformer. For all the bold talk from the Communist Party leader, Xi has put objectively few big upgrades on the scoreboard. In fact, his draconian crackdowns on tech and other sectors since 2020 made state enterprises great again. 

China, in other words, faces challenges that are far above Yi’s pay grade at the PBOC. The onus is on Xi and new Premier Li Qiang to increase the size of the private sector and let Alibaba Group and other tech disruptors shake up the economy. Beijing needs to sideline giant state-owned enterprises. If not, China risks its own chaebol-like dynamic if SOEs increase their dominance. 

In the meantime, the PBOC is on the frontlines of stabilizing an economy that isn’t playing the growth engine role Asia hoped.

It also puts Rhee’s team in Seoul in a tight spot. To be sure, there are signs Korea is becoming less reliant on China. But it’s not like Yoon has put important upgrades on the books to make Korea more vibrant or competitive since May 2022. Nor did the presidencies of Moon Jae-in (2017-2022) or Park Geun-hye (2013-2017) pulsate with reformist energy.

That complacency is aging poorly. Now, as a Chinese rebound that was assumed to be the answer to virtually all of Asia’s problems disappoints, Korea has new headwinds to worry about. The PBOC’s hasty rate cut signals trouble ahead for the rest of 2023.

by William Pesek


William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.