Our strategy must consider countervailing effects from the monetary policies of both the US and China
Indian economic administrators and bankers have their eyes fixed on Washington as they await the US Federal Reserve’s next action because it is bound to have spillover effects on India’s economy. The entire global economy is also on a cliff’s edge as it waits for the Fed to start pulling its levers. India was stung by similar actions by the US central bank in 2013, and might therefore be doubly cautious this time. But, in focusing just on the Fed, we might be ignoring another emerging epicentre of an imminent global geo-economic and geopolitical storm.
A recent blog from the multilateral financial institution International Monetary Fund alerted emerging economies on impending volatility as the US Fed starts tightening its monetary policy. Some Wall Street banks even expect the Fed to accelerate the pace of rate hikes to choke off rising inflationary expectations. The World Bank’s flagship report, Global Economic Prospects, also has a note of warning: “[Emerging market and developing economy] policy makers also face the challenges of heightened inflationary pressures, spill-overs from prospective advanced-economy monetary tightening, and constrained fiscal space."
The world has a reason to be fixated with the Fed’s tightening intentions. The ripple effects can roil markets and economies, especially those left weakened and vulnerable by the pandemic’s economic shock. Yet, people seem to be paying scant attention to another set of signals emerging from China’s central bank, the People’s Bank of China (PBOC), which has indicated a desire to move in the opposite direction and actually loosen its monetary policy. While opinion might differ on the extent to which PBOC’s policies will impact the global economy, India should be prepared for a two-speed global economy: Tightening by the US Fed and gradual Chinese loosening.
The PBOC began December by reducing the reserves that banks have to keep with the central bank by 50 basis points (its second during the year), which released additional liquidity into the system, following it up with a 5-basis-points cut in benchmark lending rates and then injecting additional liquidity through market operations. The result: commercial banks were forced to reduce lending rates. New bank lending in China during 2021 touched 19.95 trillion yuan, or $3.1 trillion, which is higher than the UK’s gross domestic product. China-watchers expect some more PBOC action during this year. What shape it will take is anybody’s guess, but PBOC sent out an unambiguous message in its 2022 work conference: “Using multiple monetary policy tools, [PBOC] will keep the liquidity adequate at a reasonable level, ensure a stable growth of aggregate credit, increase support for the real economy, and keep the growth of money supply (M2) and the aggregate financing to the real economy (AFRE) generally in line with nominal GDP growth… and keep the exchange rate basically stable at an adaptive and equilibrium level."
The question is: Should India worry about China’s moves or keep its attention focused only on the US Fed? One thing is worth noting here: despite all the rhetoric, China is among India’s leading trade partners, sometimes the largest and sometimes second-largest after the US. This is not going to change anytime soon and China’s rate actions are only making money cheaper for its manufacturing sector. Hence, it might make sense to keep one eye peeled on the PBOC’s Beijing headquarters.
The decisive steps by China’s central bank send out a deeper signal of its willingness to move in completely opposite directions from other advanced economies if its actions benefit citizens.
Increasingly, China’s contrarian moves indicate a desire to position itself as the second pole of what has effectively become a unipolar world. China appears eager to step into the vacuum created by the 1988-91 break-up of the Soviet Union. And though Vladimir Putin is actively seeking a return to former glory for Russia, universally acknowledged as a formidable nuclear power, the country’s lack of financial muscle hobbles Moscow’s aspirations.
China’s bold ambitions, in contrast, have been evident for some time now. Consider the March 2021 meeting between the Chinese (represented by top diplomat Yang Jeichi and state councillor Wang Yi) and the US (by secretary of state Antony Blinken and national security adviser Jake Sullivan): After the American delegation delivered an expected diatribe against China’s suppression of human rights and aggression in international waters, the Chinese side let it rip for over 15 minutes, against the usual protocol of limiting opening statements to two minutes. China’s top diplomat Yang Jeichi asked the US to set its own human rights record straight, referring to Black Lives Matter, and added that the US should stop pushing its own version of democracy to the rest of the world: “…the problem is that the United States has exercised long-arm jurisdiction and suppression and overstretched the national security through the use of force or financial hegemony, and this has created obstacles for normal trade activities, and the United States has also been persuading some countries to launch attacks on China."
Without judging who was right or wrong, diplomat Yang’s bellicosity is an indication of how China may engage with India on the border problem or other sticking points. It might make sense, perhaps, to shift our attention away from the Metaverse to the Sinoverse being constructed in the neighbourhood.
Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.