China’s economy has grappled with difficulties throughout the year, with a slower-than-expected recovery from stringent Covid Zero policies and an exacerbating property crisis. China’s economic outlook despite mixed data, with industrial production surpassing expectations but retail sales falling short in November, remains cautious about its growth recovery.
As per earlier data released, it painted a gloomy picture for China’s economy. China’s falling prices across different sectors, including commodities like steel and coal, as well as essential consumer goods like vegetables and appliances.
What lead to PBOC’s liquidity injections?
According to the official consumer price index, Chinese consumer prices dropped by 0.3% in July compared to the previous year.
By excluding volatile food and energy prices, core inflation actually rose to 0.8% in July, the highest level since January, up from 0.4% in June.
Deflation poses a particular risk for countries with high levels of debt, such as China, as it increases the cost of servicing that debt and may discourage borrowing, spending, and investment.
Liquidity injections to boost China’s economy
Over recent months, China’s economy has started to receive fresh stimulus to shore up itself. In a surprise move, Beijing in late October approved 1 trillion yuan of sovereign bond issuance for this year, its first such budget deficit expansion in a fiscal year in 23 years. It passed a bill to allow local governments to frontload part of their 2024 bond quotas, in a way to boost China’s economy.
China’s economy getting sustained support from the (The People’s Bank of China) PBoC’s underscores Beijing’s commitment to maintaining ample liquidity. Recent episodes of sudden cash tightness due to seasonal factors and debt issuance have unsettled investors in recent months.
On Friday, the PBoC’s liquidity injections of up to 1.45 trillion yuan through its medium-term lending facility, exceeding the 650 billion yuan coming due in December.
Traders have been engaged in prolonged debates over how the PBoC should ease its policy to stimulate growth. Some advocate for targeted tools like liquidity injections, while others suggest a reduction in the reserve requirement to release cheaper and longer-term funding.
It is certain that fiscal stimulus will play a more significant role next year. In a recent meeting, China’s policymakers called for “appropriately stepped up” fiscal measures, coupled with “prudent” monetary policy. This resonated with a pro-growth stance from a recent Politburo meeting.
Liquidity injections effect on market
The effect of liquidity injections and additional support measures on cryptocurrency market and stock market has been positive. China stocks experienced a surge, with those in Hong Kong leading gains in Asia. The Hang Seng China Enterprises Index recorded an increase of more than 3%, and the yuan recovered losses in onshore trading.
China’s economic trends display a peculiar cycle. In November, China’s inflation rate fell into deflation, marking the second month in succession, with a rate of -0.5%, slightly higher than October’s -0.2%. Historical data shows a pattern: a recession follows simultaneously each time China slips into deflation. Notable instances were around 2000 and 2008, with rates nearing -2.00%, and in 2020, just shy of 0%.
Liquidity injections effect on cryptocurrency
With the PBoC’s infusing liquidity injections to counteract the deflation. These monetary measures seem to have positively influenced the cryptocurrency market. In a fascinating turn of events the impact on Bitcoin has been tremendous. Since September, there has been a noticeable positive correlation between this increased liquidity injections and the price of Bitcoin.
The PBoC continued liquidity injections into the market have been observed to coincide with significant movements in Bitcoin’s price.
As noted as the PBoC’s liquidity injections surged, the impact on Bitcoin could be seen simultaneously as it broke above the $30,000 mark. A similar pattern was noted earlier this year, with a significant increase in PBoC’s liquidity that was followed by a rise in Bitcoin’s value.
In a year, the PBoC has expanded its balance sheet by over 7%. This multifaceted dynamic illustrates the intricate relationship between traditional financial systems and the evolving digital currency environment.
China’s economic outlook
With China’s economy sputtering and the U.S. dollar surging until recently, the yuan has had a volatile year, having weakened 6.14% to the dollar at one point before giving back some of the losses on views that U.S. interest rates have peaked.
The yuan strengthened 2.55% in November, its best month this year, but it is still down about 3.3% year-to-date.
As per the state media, China will step up policy adjustments to support an economic recovery in 2024.
“This signals that the Chinese leadership wants to put more weight on the economy than it did earlier this year,” said Tommy Wu, senior China economist at Commerzbank depicting a positive China’s economic outlook.
