China’s economic challenges, rate cuts, yield curves, and currency valuations
This week's chart pack covers the following topics:
PBoC stimulus counters manufacturing contraction amid mixed PMI signals
Macrobond users can click here to access the chart and gain deeper insights into the data.
What the chart shows
This table provides a detailed breakdown of China’s Purchasing Managers’ Indices (PMIs) from both the National Bureau of Statistics (NBS) and Caixin, covering composite, manufacturing and services sectors. It also includes components of the NBS PMI indices. All are heat-mapped based on their percentile ranks across all available historical data.
Behind the data
The People's Bank of China (PBoC) has announced monetary stimulus that includes cutting the reserve requirement ratio (RRR) by 0.5 percentage points. It also plans to implement further interest rate reductions and inject approximately 1 trillion yuan of long-term liquidity into the economy. This move has helped alleviate concerns about economic activity, as indicated by discrepancies between the NBS and Caixin PMIs and deteriorations in several official PMI components shown in the table.
The Caixin PMI has recently shown expansion. However, the official PMIs reported by the NBS have indicated contractions in manufacturing, despite slight expansions in non-manufacturing. Across various components, contractions can be observed across the board, except for business expectations, which remain in expansion.
China’s growth target at risk
Macrobond users can click here to access the chart and gain deeper insights into the data.
What the chart shows
This chart depicts China’s real GDP growth from 1994 to 2024, along with two measures of potential growth rates: one calculated using the Hodrick-Prescott (HP) filter – which extracts a trend from economic cycles – and another based on a post-global financial crisis (GFC) exponential trend projected into the next 12 months.
Behind the data
Despite the government’s 5% economic growth target, China’s economy has been encountering challenges in real estate, post-COVID activity recovery, the labor market and other areas. These issues suggest that the target may not be attainable.
Additionally, the country’s potential growth rates support this concern: The HP filter indicates a potential growth rate of 4.5%, while the post-GFC exponential trend projects growth falling below 4% in the next 12 months.
Russia and Japan buck trend of global rate cuts
What the chart shows
This table presents the key interest rates of central banks from G10 countries, China and Russia, along with the percentage of inverted spreads for each economy based on term spreads between 1-year to 10-year government bonds. Most central banks have begun their rate-cutting cycles, with exceptions being Australia, Japan and Russia. Notably, Russia and Japan have implemented rate hikes in recent months. Interestingly, while the Russian yield curve is fully inverted – indicating that all spreads between short-term and long-term bonds are negative – Japan's yield curve shows no inversion at all.
Behind the data
The widespread initiation of rate-cutting cycles among central banks reflects a global shift toward monetary easing in response to slowing economic growth amid inflation concerns. The inversion of yield curves in several economies, such as the US (46.7% inverted spreads), the UK (53.3%) and various euro area countries, signals market expectations of future economic slowdowns and potential further rate cuts. Russia's fully inverted yield curve, despite recent rate hikes, may indicate that investors expect future rate reductions or harbor concerns about the country's long-term economic prospects. In contrast, Japan's lack of yield curve inversion, even after rate hikes, suggests that the market anticipates steady economic conditions or aligns with the central bank's optimistic outlook.
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