Latest news with #Pan'sPBOC
AllAfrica
18-06-2025
- Business
- AllAfrica
China's central bank living life in the Trumpian fast lane
Few central banks, if any, are having a crazier 2025 than the People's Bank of China. When Governor Pan Gongsheng entered this most chaotic of years, his top priority was supporting economic growth as Beijing worked to address a property crisis that was fueling deflation. As the second half of 2025 unfolds, Pan's PBOC confronts higher US tariffs than even pessimists expected, the specter of recessions from the US to Japan and now outright conflict in the Middle East that could send oil prices and US bond yields skyrocketing. The mini-crash in the US government bond market in April sent shockwaves Asia's way. Along with Pan's team, central bankers from Tokyo to Jakarta were forced to take evasive measures. As the so-called 'bond vigilantes' pounced, markets everywhere were suddenly in harm's way. On May 20, Japan's Ministry of Finance saw the weakest demand for 20-year bonds at auction since 2012. The 'tail,' or that gap between the average and lowest-accepted prices, was the widest since 1987. Five weeks later, Tokyo's sale of 40-year bonds didn't go much better, causing fresh financial tremors. The tariff chaos behind these market failures is complicating the Bank of Korea's year, too. Just like Japan, Korea's economy shrank 0.2% year-over-year in the first quarter. With Trump's tariffs fanning inflation, BOK Governor Rhee Chang-yong now confronts upward risks, too. Yet it's hard for peers to rival the year Pan's PBOC is having. On Friday, Pan will decide whether to cut one- and five-year loan prime rates. In the short run, it's quite a dilemma that Chinese consumers remain surprisingly willing to open their wallets. China's retail sales in May jumped 6.4% from a year earlier, the fastest pace since late 2023. Clearly, government subsidy programs are lifting consumption. For now, at least. Linghui Fu, a spokesperson for the National Bureau of Statistics, pointed to Beijing's trade-in scheme for consumer goods. 'The launch of an action plan to promote large-scale equipment renewal and trade-in of consumer goods has boosted sales and services consumption, which strongly supported the economy,' said Fu. The rise of retail sales 'came as a surprise,' said economist Zhiwei Zhang at Pinpoint Asset Management. Zhang cautions that with property prices still falling, the outlook for consumer sentiment is not great. Yet headwinds abound. China's industrial output fell 5.8% year on year in May. Fixed-asset investment rose just 3.7% year to date, weaker than economists expected. Odds are, Pan's PBOC will be under increasing pressure from President Xi Jinping's government to add more liquidity to the economy. 'Given the prolonged property weakness, increased labor market stress and the unsustainability of export frontloading, we expect additional policy easing measures in the second half of the year,' Goldman Sachs economists wrote in a note. 'Though we caution that the urgency for significant stimulus in the near term appears lower given that year-on-year real GDP growth is on track to exceed 5% in the first half.' The second half is hard to gauge. No one can say, for example, if Trump's China tax — now 30% — might be 10% two months from now or 100%. Or whether Trump's 25% auto tax will soon be 50% or zero. The same with his levies on steel and aluminum, the state of the 'reciprocal' tariffs or the 'unilateral' rate to come. In an unbalanced, export-driven economy suffering from falling prices, this uncertainty makes it virtually impossible for Chinese companies to plan and strategize for the last five-and-a-half months of the year. Such uncertainty across a 1.4 billion-person economy is how recessions happen. Pan's challenge is even bigger than that. He's on the front lines of Trump's threats to fire Fed Chair Jerome Powell. The same goes for Trump's often-expressed desire for a weaker dollar. And the clash on Capitol Hill over giant budget-busting tax cuts. The May 16 move by Moody's Investors Service to revoke Washington's last AAA rating put an even more intense spotlight on the US's nearly US$37 trillion national debt. Analysts at Moody's argued that 'successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.' China is no longer the top holder of US Treasury securities. That dubious honor is all Japan's, which is stuck with $1.1 trillion of Washington's debt. Yet Asia and its nearly $3 trillion of Treasuries are uniquely on the frontlines of any Trump attempt to engineer a more advantageous exchange rate. The only thing more perilous than a runaway dollar luring the lion's share of global capital is a plunging one destabilizing markets everywhere. 'The central bank will likely revert to a wait-and-see mode while the US and China attempt to shore up their trade pact,' said economist Steve Cochrane at Moody's Analytics. Carlos Casanova, economist at Union Bancaire Privée, notes that 'the economy is still facing structural headwinds, while the US-China ceasefire remains exceptionally brittle.' Since the Geneva talks in mid-May, Trump has imposed measures affecting Chinese students and threatened to double steel and aluminium tariffs to 50%. 'Additional support is likely needed to prevent a sharp slowdown,' Casanova said. Yet Pan's been rather cautious about rate cuts. One reason Pan isn't cutting rates faster: a desire to preserve the progress Beijing has made in deleveraging the financial system in recent years. Pan's team worries that cutting rates might incentivize bad lending and borrowing a weaker yuan might trigger default among property developers as they find it harder to make payments on offshore debt. Already, global investors are keeping close tabs on liquidity problems at China Vanke. Putting yuan internationalization in jeopardy is another concern. For nearly a decade now, Xi's government has been working to increase the yuan's use in trade and finance. Beijing stepped up cooperation with the BRICS — Brazil, Russia, India, China, South Africa — and Global South nations to pivot away from the dollar-centric world order. Reverting back to the beggar-thy-neighbor policies of the past might alarm international funds. It also might hurt the yuan's chances of securing reserve-currency status. A weaker yuan might have Japan, South Korea and other top Asian economies thinking they have a green light, political cover, to meddle with exchange rates. That might precipitate a chaotic race to the bottom in currency markets. That would not go unnoticed by the Trump White House, which threatens the biggest trade war in world history. The Trump factor feeds into wildcard No 3: where trade tensions might leave the global economy by the end of 2025. This is arguably the least predictable policy outlook. Trump, after all, continues to change his mind about the direction of US tariffs. One day, they're coming. The next day, Trump says he hopes taxes on Chinese goods won't be necessary. Even worse, perhaps, are fears that Trump might be actively sabotaging the US economy. 'We can talk ourselves into recession, but this one feels like we're being pushed into recession – it's recession by design,' says Mark Zandi, chief economist at Moody's US jobs data 'tell us the economy continues to grow,' says Steven Blitz, economist at TS Lombard. But, he notes, 'the sum of Trump's actions can yet skew the economy in any which way, including an implosion of capital spending.' Keep in mind, Blitz says, 'that presidents have been known to accept downturns in year one of their presidency. It is a free pass, they blame the previous president and take credit for the recovery. My base case is still growth and the Fed holding still. My base concern comes from the capital markets side, break trade and you will break the capital inflows that support the economy.'
AllAfrica
19-05-2025
- Business
- AllAfrica
Moody's US downgrade rings alarm on Asia's dollar assets
Moody's reminds Asia of risks of being Washington's banker TOKYO — If Pan Gongsheng gets tired of central banking, the People's Bank of China governor may have a future in hedge fund management. In March, before the April chaos in US debt markets and last week's US credit downgrade, Pan's PBOC and the State Administration of Foreign Exchange (SAFE) displayed impeccable market timing, quietly reducing Beijing's leverage to the dollar. So much so that Beijing is now only the No 3 holder of US Treasuries, leaving the dubious No 2 honor to the UK. As recently as 2019, China was the top financier of Washington's fiscal imbalances. Japan is now on the hook for the most — US$1.1 trillion. The trouble for China, of course, is that it still has $765.4 billion of exposure to a dollar that's as vulnerable to collapse as it's been in decades. US Treasury Secretary Scott Bessent's impulse to dismiss Washington losing its last AAA rating and push ahead with the very policies behind the move may invite more downgrades — and even greater trouble for the dollar. Bessent's boss, US President Donald Trump, doesn't get all the blame for Moody's Investors Service revoking the pristine rating it first gave the US in 1919. It takes more than one presidency to run up a national debt approaching $37 trillion. But the negligence and tone deafness toward basic economic reality leaves little question why Moody's acted now, on Trump 2.0's watch. Bessent's we-wouldn't-have-done-anything-differently tone in Sunday talk show appearances explains why. Many of the giant tariffs that cratered the stock market, reanimated the 'bond vigilantes', and sent the dollar sharply lower are still with us. Traders can rejoice at Trump's lowering China taxes to 30% from 145%. But it's still at levels seen in the 1930s, when the Smoot-Hawley Tariff Act deepened the Great Depression. Markets can think Trump learned his lesson from acting so erratically — and losing virtually all of America's top allies in just four months — or admit the obvious. Many investors worry the answer is absolutely not. Investors are free to hope that Trump isn't planning to fire Federal Reserve Chair Jerome Powell. Or to push for a weaker dollar, either unilaterally or via some 'Mar-a-Lago accord' that sends the yuan shapely higher. Here, too, many investors fear he will. Folks can hope that Trump and Xi will soon sit down for 'grand bargain' talks between the Group of Two nations. Yet Chinese leader Xi Jinping isn't the caving type. Has Beijing offered Trump the slightest concession on access to China Inc. so far? Odds are, many economists worry, the Trumpian fireworks will resume. Finally, it's unclear whether Moody's got Trump World's attention in the right way. Any other US administration would internalize why Moody's cut Washington to Aa1 the way S&P Global and Fitch Ratings did in years past. Not according to Bessent's take. 'I don't put much credence in the Moody's' downgrade, Bessent told CNN. He stressed that the tax-cut bill being debated in Congress remains on track. And that it would spur economic growth that generates more than enough revenue to pay down US debt. It's an unwelcome reminder — and poorly timed one — that Trump's 1985 mindset is colliding with the global realities of 2025. As Washington gives 'trickle-down economics' another try, its credit rating hangs in the balance. So does trust in the dollar. Bessent calling credit ratings a 'lagging indicator' isn't the witty argument he thinks. Not at all moment when the Republican Party is pushing a budget package — Trump's so-called 'big, beautiful bill' — that will add trillions to the federal deficit. Estimates are US$4 trillion over the next decade added to the federal primary deficit, excluding interest payments sure to skyrocket. For now, some market participants are siding with Bessent. 'Most are dismissing the news as not a big deal, and perhaps it's not,' says Michael Kramer, founder of Mott Capital. 'After all, the US has already had two prior downgrades.' Yet there's no arguing that the timing of all this could hardly be worse. 'The key issue,' Kramer says, 'is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.' As such, notes Tracy Chen, a portfolio manager at Brandywine Global Investment Management, it remains to be seen whether the market reacts differently as the 'haven nature of Treasury and the US dollar might be somewhat uncertain' now. But the dollar's troubles go much deeper than that. The euro's rally in recent weeks has global markets buzzing about viable dollar alternatives. European Central Bank President Christine Lagarde said the recent rise of the euro against the dollar is a consequence of US President Donald Trump's erratic policies and an opportunity for Europe. 'It's impressive to note that in a period of uncertainty when we should normally have seen the dollar appreciate significantly, the opposite happened: the euro appreciated against the dollar,' Lagarde told La Tribune Dimanche newspaper. 'It's counterintuitive, but justified by the uncertainty and loss of confidence in US policies among certain segments of the financial markets.' One big worry is that US inflation remains stubbornly high as gross domestic product shrinks. Stagflation risks may be riding in real time as Trump's tariffs hit US households. 'Even if a mild recession takes hold, a higher inflation outcome seems assured given the addition of tariffs to the trajectory of ever bigger budget deficits,' says Steve Blitz, managing director at TS Lombard. 'Monetary policy alone cannot reverse the trend without the deficit shrinking.' Jeffrey Roach, chief economist for LPL Financial, adds that 'the uncertainty about what might happen after these temporary trade deals makes things difficult for the Fed since stagflation remains a risk. If the fog does not clear, the Fed might not be able to adjust policy in June.' In other words, Trump's climbdown on tariffs might've been too little, too late. 'Even though tariff fears have calmed, more time is needed to see how the existing tariffs take shape and affect inflation and the economy,' says Skyler Weinand, chief investment officer at Regan Capital. 'Unless we start to see unemployment rise significantly, the Fed is likely to keep rates unchanged for the next six months.' Analysts at JPMorgan Chase & Co point to a Moody's report from 2023, when the ratings company shifted its US outlook to negative. On Friday, Moody's said US governments have consistently 'failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.' In 2023, it warned that this moment would likely come. But it's an open question whether Moody's is about to revive another 2023 opinion that got lots of attention. At the time, Moody's argued the dollar's place at the center of the global trading system was safe. As Moody's wrote in May 2023: 'We expect a more multipolar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full.' Yet, it warned then that increased US protectionism, weaker government institutions and concerns about a default would imperil the dollar's global dominance. 'The greatest near-term danger to the dollar's position stems from the risk of confidence-sapping policy mistakes by the US authorities themselves, like a US default on its debt, for example,' Moody's warned two years ago. 'Weakening institutions and a political pivot to protectionism threaten the dollar's global role.' It hardly helps that Trump's inner circle has, at times, flirted with the idea of limited defaults to gain leverage over trading partners. Another big risk is the collision course between Trump and Powell. In a social media rant over the weekend, Trump wrote: 'THE CONSENSUS OF ALMOST EVERYBODY IS THAT, 'THE FED SHOULD CUT RATES SOONER, RATHER THAN LATER.'' He added that 'Too Late Powell, a man legendary for being Too Late, will probably blow it again – But who knows???' TS Lombard's Blitz says that 'one can, in fact, imagine a scenario where the Fed helps the dollar strengthen to keep in check the real interest rates needed to sustain needed inflows and all that, in turn, overwhelms the tariffs as a barrier to keep firms from sourcing foreign capital and labor.' This, however, would enrage Trump, upping the odds that he tries to fire Powell. Herein lies one of the top risks to US Treasuries and the dollar. This fragility of US Treasuries is imparting a unique leverage point for the Bank of Japan, PBOC and other top Asian monetary authorities. Asia's main leverage over Washington right now is bonds, currencies and in services trade. This latter piece refers to America's deep dependence on Asian markets for financial services, technology, and intellectual property. The mechanics of Trump's trade war suggest an imperfect understanding of the US economy's Asia-related vulnerabilities. And poor situational awareness, as China and the Global South join forces to find an alternative to the dollar.
