The Chinese central bank has started to engage with European financial institutions amid worsening economic conditions and deflationary threats.
China's Monetary Policy and Its Consequences
In response to the economic slowdown, the People's Bank of China (PBoC) began reducing interest rates, cutting the base rate from 1.8% to 1.4%. However, domestic demand remains insufficient, and prices have been falling for four consecutive months. The PBoC acknowledged the presence of 'insufficient domestic demand, persistent low prices, and various hidden risks.'
Lessons from Europe and Japan for China
Chinese financial authorities have reportedly reached out to several major European banks for assistance, wanting to learn how to manage low interest rates. Europe faced similar challenges after the 2008 financial crisis when the European Central Bank employed zero and negative interest rates. 'This shows they're learning and getting ready,' noted an economist at a European bank regarding the PBoC's inquiries.
Market Reactions to the Situation
China's financial markets have begun to respond to the economic slowdown. Long-term bond yields have dropped significantly, with the 30-year yield falling to 1.86% and the 10-year yield to 1.65%. Investors, worried about weak growth prospects, are moving into safer assets, which further lowers yields.
Despite lowering interest rates, the Chinese economy continues to face challenges that require adaptation and new strategies, potentially necessitating learning from foreign experiences.
