From CNBC: 2024-09-24 22:33:15

China’s economy needs more than just interest rate cuts to boost growth according to analysts. The People’s Bank of China announced cuts in rates, including existing mortgages. Stocks surged on the news, but bonds showed more caution. China’s 10-year government yield fell to a record low of 2%.

The market reflects diverging expectations for growth in China and the U.S. The U.S. 10-year Treasury yield is at 3.74%, much higher than China’s. Expectations for growth have shifted since 2022, with the Fed’s aggressive rate hikes, creating a divergence in the market expectations.

China’s Ministry of Finance has been conservative in fiscal stimulus measures, reverting to a 3% deficit target this year. There is a 1 trillion yuan spending shortfall to meet fiscal targets. Analysts do not expect Chinese 10-year government bond yield to drop significantly, even with rate cuts announced by the PBOC.

Rate cuts by the U.S. Federal Reserve ease pressure on Chinese policymakers by weakening the dollar against the yuan, boosting exports. China’s offshore yuan hit its strongest level against the dollar in over a year. Despite this, more fiscal stimulus is needed for China’s economic growth.

The PBOC’s rate cuts have improved market sentiment and confidence in economic growth. However, fiscal stimulus is still necessary to expand credit and benefit the real economy. High corporate and household leverage in China limit the effectiveness of loose monetary policy. The U.S. Fed’s easing policy provides relief on China’s FX market.

Read more: China is easing monetary policy. The economy needs fiscal support