CPI Near Zero, Trade Surplus Swings, Currency Drops, Central Bank Cuts Rates

After a strong recovery in the first quarter, the economic data for the second quarter have raised some concerns about the momentum of China's economic recovery.

According to data released by the General Administration of Customs, from April to May, just within one month, exports turned from a year-on-year increase of 8.5% to a year-on-year decrease of 7.5%, and the trade surplus also dropped from 82% year-on-year to -16%.

At the same time, the CPI is only 0.2%, indicating that domestic demand is still sluggish.

Reflected in the exchange rate of the yuan, both onshore and offshore yuan exchange rates have already broken through 7.18, and have fallen by 3,400 points since the second quarter, with almost no signs of rebound.

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Just as calls for saving the economy are rising in the market, the central bank has acted decisively and chosen to cut interest rates at the first opportunity.

On June 13, the People's Bank of China carried out a 20 billion yuan 7-day reverse repurchase operation in the form of interest rate bidding, with a winning interest rate of 1.90%, down by 10 basis points.

The central bank's lending, followed by the MLF interest rate, has also been reduced, and it can be determined that the LPR will also be reduced soon, officially starting a cycle of interest rate cuts.

What do these pieces of information indicate about the state of China's economy? What signals have been released? How will it develop in the future?

Exports are under pressure, and domestic demand is still at a low level.

In March and April of this year, China's foreign trade exports grew significantly, far exceeding market expectations, but when it came to May, exports began to shrink again.Next is the trade surplus. In the previous few months, China's trade surplus has been continuously expanding, with a year-on-year increase close to doubling in April. However, the trade surplus in May suddenly became -16% year-on-year.

The reasons behind this are not difficult to analyze. In March and April, on the one hand, because the base number from last year was relatively low, and on the other hand, because of the wave of overseas order grabbing that just started after the relaxation at the end of last year, it happened to be delivered at this stage, so the data at this stage was not objective enough. The data for May is likely to be the norm we have to face for the next period.

In fact, inflation pressures in Europe and the United States are high, and continuous interest rate hikes have suppressed market demand. The global export market is under pressure.

Not only us, but also many Asian countries including Vietnam, South Korea, and India, have poor export performance.

After all, external demand is there, and this is not something that can be changed solely by our own efforts, so it may be difficult for exports to improve significantly in the short term.

In addition to the pressure on exports, the situation on the domestic demand side is also not optimistic.

In April, the CPI rose by 0.1% year-on-year, and in May, the CPI rose by 0.2% year-on-year. Although there was a brief "travel boom" during the May Day holiday, people's willingness to consume is obviously not that high, and they still lack confidence in the future economic situation.

To solve the problem of low CPI growth and to boost consumer confidence, the central bank has also taken decisive measures: lowering interest rates and releasing liquidity.

The central bank took decisive action to convey confidence.

The economic data for May has just been released, and on June 13, the central bank lowered the 7-day reverse repo rate by 10 basis points to 1.9%, marking the first interest rate cut this year.The central bank's interest rate cut means that residents will receive lower interest on their deposits in banks, which may lead them to be more inclined to take the money that would have been deposited in banks and invest it in higher-yielding investments, or simply spend it.

Therefore, the interest rate cut is good news for the economy, stock market, and real estate market.

However, it is still uncertain how much liquidity the current reduction of 10 basis points in short-term policy interest rates can bring to the market and how much money can be introduced into the market.

But the more important significance of such a rapid interest rate cut is actually the transmission of confidence.

The essence of the economy is confidence, and confidence is the foundation of all economic activities. Only when people have a good expectation for the future will they consume boldly, driving the market to prosperity and allowing the economy to improve.

So, compared to the interest rate cut itself, what is more interesting is the timing of the cut. Such a quick decision is sending a signal to the market:

Promoting economic recovery is the main theme at present, and the country will not stand idly by. As long as the economy does not pick up, there will be more proactive measures to stabilize consumption, foreign trade, and investment in the future. Everyone just needs to roll up their sleeves and work hard.

At a critical time, what cards will be played?

In terms of the external environment, it is unlikely that a reversal will occur in a short period of time.

After the Federal Reserve raised interest rates ten times in a row, the inflation rate in the United States in May was still 4%. Although this is the lowest level in two years, it is still a long way from the Federal Reserve's 2% target.Hindered by the United States, the European economic situation has become even more severe, with significant downward pressure on the Eurozone economy and the risk of stagflation continuously expanding.

In the first quarter of this year, Germany's GDP fell by 0.3% quarter-on-quarter, marking two consecutive quarters of decline and officially entering a "technical recession." Meanwhile, the United Kingdom is grappling with persistently high inflation, reaching 8.7% in May, making economic development challenging.

As a result, global market demand is slowing down, and under such circumstances, it may be difficult for China's exports to see significant improvement in the short term.

Exports have always been a crucial tool for us to absorb employment and drive GDP growth. With exports under pressure, domestic demand becomes a top priority.

Of course, we have anticipated such a situation and have been emphasizing the stimulation of domestic demand since the end of last year. This year, the emphasis has been repeatedly placed on prioritizing economic construction. The recent interest rate cut has sent a positive signal, and fully supporting the real economy remains the main theme of the moment. It is believed that a series of policies aimed at stabilizing growth will be introduced subsequently.

From a monetary policy perspective, some measures have already been taken. This year's M2 growth rate has been relatively fast, and now interest rates have started to decrease. However, as the US dollar is still in an interest rate hike cycle, a significant reduction in our interest rates could put considerable pressure on the exchange rate. The current exchange rate of the Chinese yuan has already broken through 7.15, so it may take a few more months before there is more room for interest rate cuts.

Additionally, from a fiscal policy standpoint, there are still many tools available. For instance, some economists have previously mentioned the idea of distributing money to all citizens, doing so continuously for one or two years, and not believing that domestic demand would not rise.

It is believed that the coming period will be crucial, and people should be able to see more significant measures to support domestic demand. The Chinese economy is值得期待！In conclusion:

After two to three decades of rapid growth, China's economy still possesses formidable momentum, and as of today, it remains the most dynamic market globally.

Amidst the backdrop of a global economic downturn, even though China's economy may slow down compared to the past, institutions such as the World Bank still forecast that China will maintain a high growth rate of over 5%.