Asia Tea Time - Cup 64 ☕

This week I talk interest rate cuts and the Third Plenum in China as well as what you should do with that work bonus. 

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Macro in Asia

China’s central bank cuts key 1-year interest rate as economy slows

China’s central bank – the People’s Bank of China (PBoC) – surprised markets by cutting lending rates for corporates by 0.1%.

It was the first such interest rate cut by the PBoC since August 2023 and comes at a time when investors are looking for measures to rev up the slowing Chinese economy. 

Why it’s happening

• China’s economy is weak sauce right now. The world’s second-largest economy grew at 4.7% year-on-year in the second quarter of 2024 – significantly down from the 5.3% growth rate in the first quarter.

• The rate cuts come shortly after China’s Third Plenum ended on 18 July. The gathering of top China’s Communist Party (CCP) officials is typically an occasion for major economic reforms to be announced. No such announcement came this time.

Why it matters

• China’s economy is being hit by multiple headwinds – including a property debt crisis, super low inflation, weak consumer confidence, and an ageing population.

• Super low lending rates could help corporates temporarily but much stronger support measures have been called for by commentators.

What’s next?

• That golden “5%” growth target for 2024 GDP is on all policymakers’ minds in China so watch out for future signals of where China’s economy is headed in the back half of the year.

Tim’s Take 

The “wait-and-see” approach with China continues to be in waiting mode.

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The latest Third Plenum seemed to confirm the conservatism of the Chinese government when it comes to stimulus measures. 

A weak economy that’s been weighed down by a consumer that’s not spending – a key retail gauge showed sales rose just 2% in June – isn’t really fazing the CCP or the PBoC. 

While many investors are hoping for a massive “bazooka” of fiscal stimulus which will get the Chinese economy out of its current funk, President Xi isn’t obliging.

And at the end of the day, what President Xi thinks matters the most. The usual empty promises to “give fuller play to the role of market mechanisms” was paraded about at the latest Third Plenum.

It’s a shame because the meeting has traditionally been a place for big reforms, such as in 1978 when Deng Xiaopeng used it to announce groundbreaking market reforms.

Debt and “moral hazard” are the focus of the CCP today, though. While it’s certainly laudable, it won’t help solve the many issues that the economy is facing.

Indeed, nothing new was offered at the meeting and the interest rate cuts that followed didn’t really move sentiment – it’s the government’s typical playbook every time they feel they need to do something.

Besides, it’s not corporate lending that’s the issue, it’s the weak Chinese consumer and the threat of entrenched low inflation/deflation.

Until that’s solved, investors can be confident that they’ll be waiting for a while for real action to be taken.

Tim's money tip of the week

Getting our bonus is always a time to celebrate. Yet it also poses the question of “what should I actually spend it on”?

While it’s super tempting to just go out and splurge it all on a cool holiday or whatever list of goods we’ve wanted forever, it can pay off to take stock.

That’s because the whole advice piece of “responsible retirement investing” doesn’t really get us excited (rightly so).  

So, putting a significant portion of our bonus towards our retirement isn’t top-of-mind when we get a decent slab of cash.

But it should be because it can help us reach our retirement goals a lot earlier. That doesn’t mean we have to put 70-80% of our bonus towards retirement. This can include investing into long-term things like ETFs or contributing/topping up our CPF account.

By starting with a smaller amount of 25-35% of our annual bonus and perhaps working up towards 50%, we can get to enjoy that guilt-free spending on stuff we enjoy knowing that we’ve stashed away a decent amount for our retirement.