Economic analysis: concerns about the decoupling of monetary policy between the United States and China


Fears of a repeat of the crisis triggered by China in 2016
Concerns are growing about the decoupling of monetary policies between the United States and China. The 2-year US Treasury yield rose further to overtake the 2-year Chinese government bond yield by around 1%p, bringing back the painful memory of 2015-2016. The Shanghai Composite Index has fallen around 50% in just six months from levels of 5,000 points reached in May 2015, pushing economic momentum to its weakest level since the financial crisis.

Differences between 2016 and 2022
We see differences in economic conditions between yesterday and today. In 2016, the US economy was about to enter a recovery phase, with US households deleveraging since the end of the financial crisis. China’s economy feared falling into a long-term slump, weighed down by excess supply in the manufacturing sector. Demand was weak both at home and abroad. While the United States faces inflation challenges in 2022, China is seeing a rapid recovery in exports on pent-up demand, even with COVID-19 lockdowns in place.

China’s domestic demand has started to recover after the easing of pandemic-related restrictions, which has given new impetus to the economic recovery.
Unlike in the past, the objective of the current monetary tightening in the United States is to control inflation even at the risk of an economic slowdown. The outlook is brighter for China, which has room to maintain monetary easing to stimulate the economy as inflation is under control.
Positive and negative aspects of monetary policy decoupling
The recovery of the Chinese stock market was driven by an increase in the PER amid growing expectations of economic recovery. The bond market, on the other hand, remains cautious about the widening spread between Chinese and US bond yields. In terms of the real economy, exports may be affected by a slowdown in demand linked to the weakening of purchasing power in developed countries. Delays in the improvement of the Chinese labor market could hamper the recovery of domestic demand.
Source: Korea Affairs


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