Small businesses, big challenges: The reality of China’s post-US Fed cut economy
The interest rate cuts by the US Federal Reserve will not likely be strong enough to boost China’s economy, experts told CNA, but the moves could certainly help inspire confidence as China pushes ahead with new policies and measures.
SINGAPORE: At the heart of Shanghai’s bustling 'Ju Fu Chang' district - an area comprising the Julu, Fumin and Changle Roads in the Puxi neighbourhood - sits a trendy new bar inspired by The Beatles.
The doors to 'Strawberry Fields’ opened in mid-September, the brainchild of Mr Daga, a 31-year-old former architect from the city of Guangzhou, and his partner, 26-year-old Ms Yiyi, once a fashion designer from the northeastern Liaoning province.
Fueled by the desire to reshape their lives, the couple took a leap of faith, using their savings to start a new business amid ongoing economic uncertainty.
“I started bartending full-time in May,” Mr Daga, who prefers to be known by that name, told CNA. “After I quit my job, my partner left hers. We now run the bar together.”
China has been trying to crank up its economy in recent weeks, and keeping to its commitment of achieving a 5 per cent growth for the year. But for some young entrepreneurs, they are not feeling encouraged.
“From a long-term perspective, the Chinese economy still doesn’t look optimistic because of fundamental issues like the falling birth rate and ageing population,” he added.
The decision by the US Federal Reserve on Sep 18 to slash rates sent global markets rallying and had far-reaching implications beyond America, experts said – influencing mortgages, monetary policies and financial markets around the world.
In China, jobseekers, households, and businesses like Mr Daga’s bar, have been navigating a complex post-pandemic economic environment.
SILVER LININGS FOR CHINA’S ECONOMY
The Fed’s easing alone will not be the cure-all for the world’s second largest economy which has been faltering amid a property crisis, weak spending and high youth unemployment rates among other woes, experts have noted.
But the moves did in fact, help create “a more favourable environment for China to ease its own policies without negatively impacting other priorities”, according to Mr Lynn Song, chief economist for Greater China at ING.
“The main impact should be through Chinese policymakers finally unleashing more policy support in the aftermath of the Fed cut,” Mr Song said. “Lower interest rates tend to most directly benefit real estate due to the leveraged nature of the industry, while the impact on retail and manufacturing may be less direct.”
On Sep 29, China’s central bank announced the lowering of mortgage rates for existing homes before the end of the month, a measure welcomed by experts who said it demonstrated policymakers’ resolution to turn things around.
In an attempt to stem the downward spiral that saw housing prices in August fall by their fastest rate in nearly a decade, the People’s Bank of China (PBOC) reduced the deposit requirement for Chinese citizens looking to buy a second home.
“China quickly followed the Fed and used the scope to cut short-term interest rates and permit refinancing of existing mortgages at lower interest rates,” said Mr Gerwin Bell, lead economist at Prudential Financial.
“The Fed’s (cuts) could have implied more appreciation pressure on the yuan, which would make deflation worse. (But) by cutting domestic rates, the Chinese authorities mitigated that additional deflationary risk.”
And it’s pushing some individuals to make a move. Mr Stephen Mao, a 28-year-old office worker in Shanghai, plans on buying a modest house downtown for convenience.
He currently lives with his family in the Qingpu suburban district, which takes him about an hour by metro to travel to the city centre. “We don’t have that kind of money, so I am just looking to buy a small house with just a bedroom and a living room,” Mr Mao told CNA.
Taking out a loan is not an option for him. “The government’s policy solidified our intention (to make a purchase), (but) we don’t want to get crushed by mortgage loans,” he added.
Housing challenges are not limited to individual buyers like Mr Mao, but also weigh heavily on small business owners like Mr Daga and Ms Yiyi. While their primary concern is managing the bar’s fluctuating income, the couple is also grappling with the high cost of living.
They rent a two-bedroom apartment in the city for 10,000 yuan (US$1,414) a month, but are now contemplating relocating.
“Once our current lease ends later this year, we may move to a place with cheaper rent in a more remote area,” Mr Daga said.
“The cost of living (in Shanghai) is definitely a big challenge. We haven’t considered purchasing big-ticket items like property or cars.”
Out of their pockets monthly, too, is around 40,000 yuan to rent a space in an area that’s popular for its blend of modern culture with historical charm, which places a significant burden on their expenses.
The bar is in “a hotspot area for drinking”, Mr Daga added, but lamented that business is no longer what it used to be. “Even the well-known bars see very few customers on weekdays.”
Another big concern: labour costs. “We tend to manage the bar ourselves more and hire part-time staff to handle the daily operations,” he said. “Full-time employees are not part of our long-term plan.”
Analysts also told CNA that the impact on small businesses would likely be largely indirect and minimal. “I don’t think Fed cuts will have much effect on Chinese consumers,” said Mr Bell, who added that “small companies with a domestic focus are less impacted”, while citing low domestic confidence as a limiting factor.
“Generally, small businesses and individuals are shielded from direct impact by broader policy adjustments,” said Australian financial columnist Mr Daryl Guppy, also the CEO and founder of Guppytraders.com.
He noted that global tariffs and sanctions would play a far more significant role in influencing Chinese consumption habits than US monetary policy.
“The primary impact will be in price changes for goods imported from the United States.”
FOLLOWING THE FED?
While China’s central bank hasn’t mirrored the Fed’s aggressive stance in cutting rates, it has implemented a series of smaller cuts - including policy interest rate by 0.2 percentage points, and lower banks’ reserve requirements by half a percentage point.
But Mr Guppy pointed out that the PBOC’s moves were not a direct response to recent moves by the US.
“PBOC policy decisions are not taken in a knee jerk reaction to US policy,” Mr Guppy said. “The impact of lower rates always increases consumer and business confidence because it lowers the cost of borrowing and debt servicing.”
Analysts say Beijing’s historical reaction to US Fed rate cuts could also provide some much-needed insight into its likely future moves.
According to Mr Bell, China historically “has had a very different monetary policy framework than the Fed’s interest-rate focused approach.”
“For much of the early 2000s, China pursued a currency peg, and after that, a much more quantity-driven framework focused on the quantity of credit rather than their cost,” Mr Bell told CNA.
He also explained that China was “more insulated”, because of its relatively “closed” capital account, at least until 2015, which helped it experience fewer spillovers from international financial conditions. Under a closed capital account, companies and individuals cannot move money in and out of the country except in accordance with strict rules.
“When severe crises hit which threatened to spill over via the trade channel, China relied on very large fiscal and credit stimulus.”
Others believe the focus of Chinese policymakers should be on tackling these internal issues like reviving the faltering economy, which may necessitate a more nuanced approach this time around.
“China's reactions are tempered by the needs of the domestic economy and policy directions,” he said. “US Fed rates movements are a factor that may make it easier, or more difficult, (for China) to continue with an appropriate domestic policy,” said Mr Guppy.
Mr Bell though thinks that China “should not be in a place where Fed moves matter much” but given the current economic circumstances, he concedes that “any international conditions” including Fed rate policy would have “a more salient impact on the Chinese economy”.
“But that is not a given, much rather a reflection of lacking policy actions in Beijing,” Mr Bell added.
CHINA SHOULD “TAKE ADVANTAGE OF THIS WINDOW”
While observers say China’s response to the US Fed rate cuts has been measured, they believe there is room for more aggressive action.
According to Mr Bell, China’s current monetary policies are increasingly ineffective at stimulating demand. He has warned that “lower interest rates” in the country would have increasingly small effects.
“They are ‘pushing on a string,’ so to say. China is now almost a textbook case of Keynesian “aggregate demand deficiency” where monetary policy has become almost impotent,” he said.
He is advocating for a “large, money-financed fiscal stimulus” that would stimulate demand and help combat deflationary pressures.
If the US Federal Reserve continues to lower interest rates in 2024 and beyond, analysts say China may be forced to make more decisive moves to safeguard its economy. In such a scenario, Beijing could further ease its own interest rates to manage capital flows and maintain the competitiveness of its currency, the renminbi (RMB).
ING’s Mr Song emphasised the need for more support. “When interest rates come down, this should help revive credit activity and investment.” However, he cautioned that easing interest rates alone may not be enough, given the broader economic climate of uncertainty and deflation.
Still, he is optimistic about the yuan’s trajectory, suggesting that the US rate cuts were “generally a positive story for the yuan and China’s capital markets.”
“We are expecting China to continue rate cuts until the economy shows better signs of stabilisation, with likely another two or more (Fed) rate cuts to go in the upcoming year,” Mr Song told CNA.
“I think China should be aggressively easing policy to take advantage of this window to support its own economy without negatively impacting its currency stability.”
However, Beijing must also balance the risk of too much monetary easing, which could lead to financial imbalances and rising bad debt.
Prudential Financial’s Mr Bell warns that without addressing underlying deflationary pressures, further rate cuts could exacerbate China’s bad-asset problem.
“Lower interest rates will ease debt service, no doubt. But the risk is that with unchecked deflation, they are only playing catch-up,” he said.
He believes taking additional interest rate cuts will not do much to stimulate demand, cautioning that “confidence among households and businesses” was still too low and deflation favoured saving rather than borrowing at positive interest rates.
“Fed rate cuts would enable China to implement a significant demand boost via money-financed fiscal stimulus (usefully benefitting local governments and property developers, both sectors that are desperate for new funds),” Mr Bell said.
“With the Fed easing, such moves by China need not trigger a new wave of capital outflows. However, so far the Chinese authorities have not taken that step.”
The Fed rate cuts will not likely be strong enough to boost the world’s second-largest economy, but experts believe the moves could certainly help inspire confidence as China pushes ahead with new policies and measures.
For Mr Daga and Ms Yiyi, while “every aspect” of their lives has been affected, they’re choosing to focus on the business.
From themed events to collaborations with local creatives, they’ve implemented creative strategies to draw in crowds, hoping to transform their bar from just another drinking spot into a cultural hub.
“Ultimately, we are transitioning from just selling drinks to creating more ‘emotional atmospheres’,” Mr Daga said.
“As long as we can manage (Strawberry Fields) well and (make enough to) replace our previous income, we will be satisfied.”