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Analysis: China’s interest rate cut and Xi’s speech at WEF hint at economic struggle

While the U.S. Federal Reserve led the global central banks to actively raise interest rates in 2022 to combat inflationary pressures, China’s central bank has recently cut the rates. China warned that if European and American central banks raise interest rates too quickly, it would “slam on the brakes” of the global recovery from the COVID-19 pandemic. 

Recently attending the World Economic Forum’s Davos agenda virtual dialogue session, Chinese leader Xi Jinping said that despite the emerging risks of global inflation, policymakers should strengthen economic policy cooperation to avoid another economic downturn. Furthermore, he emphasized that the world must do its best to eradicate the shadow of the pandemic while promoting economic recovery and social development.

In his speech, Xi criticized protectionism and unilateralism, saying it “hurt the interests of others as well as one’s own.” However, he also added that “A zero-sum approach that enlarges one’s own gain at the expense of others will not help” and aimed for “win-win cooperation.”

Chinese media Apollo News analyzed that Xi’s argument has exposed China’s economic weakness, highlighting the country’s predicament as it’s falling into a severe recession relative to Europe and the United States. While the overheating of the European and American economies has caused inflation risks, the Chinese economy is on the brink of disaster.

To stabilize a faltering economy, China’s central bank on Jan. 17 lowered the borrowing costs of seven-day reverse repurchase agreements by 10 basis points to 2.1% and cut the medium-term lending facility rate by the same margin to 2.85%.

Analysts interpreted that as the Chinese New Year and the Winter Olympics were approaching. Although the COVID-19 pandemic continued to worsen at the same time, the central bank’s move was intended to prevent the economy from collapsing at a critical moment.

As for the United States, consumer prices surged by 7% year-on-year in December 2021, setting the highest inflation level in nearly 40 years.

Fed officials have overwhelmingly advocated that they will actively raise interest rates in 2022 to combat inflation, which might be as soon as March. In addition, the Bank of England and the European Central Bank have also released tightening signals one after another, echoing the tone of the Fed’s rate hike.

According to the most recent data, China’s economy slowed 4% in the three months from October to December last year, compared to the same period in 2020.

National Bureau of Statistics data showed that the COVID-19 pandemic and the property sector crisis hurt China’s growth, which recorded the worst expansion in 18 months.

Experts believe China’s economic slowdown in the fourth quarter of 2021 is related to the pandemic, especially its zero-Covid policy. Many major cities were blocked, causing production and consumption to stagnate. They are concerned that Beijing’s anti-COVID policy will directly impact the global supply chain, which offsets the efforts of Europe and the U.S. to raise interest rates to fight inflation. As a result, a supply chain crisis might be born.

According to Chinese media, the lockdown of Xi’an will enter its third week. At the same time, Tianjin, Zhengzhou, and some areas such as Zhongshan and Zhuhai have also imposed mandatory blockade measures.

Goldman Sachs has recently lowered China’s GDP growth forecast in 2022 from 4.8% to 4.3%, which is much lower than Xi Jinping’s tolerance of 5%.

The forecast indicated that the Chinese regime would continue to extend the zero-COVID policy and that private consumption would remain limited.

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