On the stage of the global economy, monetary policy plays the role of precise regulation, aiming to maintain the delicate balance of the economy. At first glance, the US interest rate hike and China's interest rate cut may seem like opposing strategies, but in reality, they are the two major economies' clever response to changes in their respective internal and external economic environments.
The monetary policy of China and the United States presents a clear reverse cycle. The U.S. has continued to raise interest rates to fight inflation, while China has cut interest rates to ease downward pressure on the economy. This policy contrast illustrates the two countries' different strategies for tackling global economic challenges. China's interest rate cuts, especially in the context of widespread interest rate hikes in other major economies around the world, demonstrate our independent monetary policy stance and the importance we attach to domestic demand and economic transformation.
U.S. monetary policy is closely linked to global capital flows. As the world's largest consumer market, interest rate adjustments in the United States directly affect the pulse of the global economy. At present, inflationary pressures are rising, the purchasing power of the US dollar is declining, and consumers' willingness to buy is weakening. Against this backdrop, timely interest rate hikes are particularly important in order to curb overheated consumer demand and avoid excessive economic inflation, thereby maintaining the value of the currency and economic stability.
For example, since the Fed began its rate hike cycle in March 2022, the cumulative rate hikes have reached 525 basis points. This series of policy adjustments has not only slowed economic growth in the United States, but also added uncertainty to the global economy. In emerging market and developing economies, these adjustments have led to higher debt costs and the risk of capital outflows, triggering volatility in global financial markets.
Latin American countries are facing dual pressures from capital outflows and currency depreciation due to interest rate hikes in the United States. At the same time, major currencies such as the euro, the Japanese yen, and the British pound also fell to multi-decade lows due to the strengthening of the dollar. Aggressive interest rate hikes and quantitative tightening in the United States, coupled with a rapid pace of quantitative tightening, have had a profound impact on the global economy.
In the United States, successive interest rate hikes have led to 30-year mortgage rates rising above 7% in some regions, dampening activity in the housing market. For the global economy, the persistently high interest rates in the United States and the possibility of further interest rate hikes have forced other countries to follow suit, pushing up global interest rates and putting additional pressure on world economic growth.
As the world's manufacturing hub, China's strong productivity relies on stable currency** and liquidity support. Therefore, interest rate cuts can not only stimulate corporate investment and promote production, but also avoid the economy falling into deflation and ensure the vitality of the ** chain and the sustainability of economic growth.
Large real estate developers, such as Country Garden, are facing huge losses and debt stress, which is affecting not only China's domestic financial stability and household wealth, but also global demand for commodities ranging from soybeans to luxury goods. Under such circumstances, interest rate cuts can effectively alleviate the financing costs of enterprises, stimulate consumption and investment, and maintain economic growth.
The interest rate policy of the United States affects the global economic landscape. When inflation is climbing and affecting every corner of the market, the Fed's decision to raise interest rates is even more important. This is not only a financial game, but also a contest of global economic power.
Let's illustrate this with a simple model:
Let's say there are $100 and 100 items in the U.S. economy, each worth $1. But with the occurrence of inflation, the amount of money increased to $1,000, and the amount of goods also increased to $10 a piece. In this case, the United States is faced with two options to curb inflation: one is to reduce the amount of money in the market by raising interest rates, and the other is to increase the number of commodities to stabilize. However, due to the frequent sanctions imposed by the United States on other countries, especially China, which has been called the "factory of the world", the latter option has become less viable.
Pre-inflation: $100 100 items = $1 piece.
After inflation: $1,000 100 items = $10 pieces.
As a major global producer, China's exports are restricted, resulting in some goods not being able to be exported to the United States, but increasing the domestic market**. This surplus can lead to a decline in goods, i.e., deflation. In the face of deflation, China can choose to reduce production capacity to lower goods**, or increase the amount of RMB circulating in the market by cutting interest rates.
Before deflation: 1000 RMB 100 goods = 10 RMB pieces.
Post-deflation: 1000 RMB 200 items = 5 RMB pieces.
The U.S. interest rate hike and China's interest rate cut seem to be a monetary policy showdown between the two economic superpowers. However, the supply and demand behind this is far more complex than it seems. The U.S. interest rate hike means that the cost of capital has risen, and investors are looking for higher rates of return, which directly affects the direction of global capital flows. China's interest rate cuts are an effort to stimulate the domestic economy and boost consumption and investment by lowering borrowing costs.
But it's not just a simple supply and demand game. Rising interest rates in the United States could lead to capital outflows from emerging markets, increase debt burdens, and even trigger currency crises. At the same time, China's interest rate cuts, while boosting the economy in the short term, could also exacerbate asset bubbles and increase risks to the financial system. The interweaving of these two policies is actually an intricate web in the context of the global economy.