China is now at a critical juncture.
With the pressure of US tariffs increasingly pressing, Beijing was forced to take the extraordinary step of cutting its main lending rate to its lowest level in history.
The rate cuts to 3.0% and 3.5% are not just a boost but a big sign that Beijing is becoming increasingly desperate.
Not only that, the PBOC also lowered the reverse repo rate and cut the bank reserve ratio by 50 basis points, giving banks more room to ease lending.
The market received the move with mixed reactions with the Hang Seng Index jumping 1.3% immediately after the market opened, but the yuan continued to weaken.
Analysts described the move as no longer a matter of stimulus, but a sign that China is protecting itself from a bigger storm – the unfinished trade war, the global slowdown, and the people's internal concerns about the future of the country's economy.
Although China’s GDP growth in the first quarter was 5.4%, which was above expectations, other data have pointed to a gaping hole.
Exports rose 8.1% in April, but shipments to the US fell 21%. Retail sales were weak, up just 5.1%, and real estate investment fell more than 10%.
With US-China talks continuing in Switzerland and a “tariff truce” lasting only until August, the pressure on Beijing is mounting.
People are increasingly uneasy – property prices are falling, investment is shrinking, and jobs are still not fully stable.
Now they have only one last bullet in their arsenal – bolder fiscal policy or the risk of the economy sinking further.
