On September 19, the Federal Reserve announced that it would lower the target range for the federal funds rate by 50 basis points to between 4.75% and 5%, the first rate cut since March 2020.

On September 24, the central bank followed by the announcement of a series of interest rate cuts and reserve ratio reduction, 300 billion, 500 billion... We will lower the reserve requirement ratio and policy interest rate, lower the interest rate on outstanding mortgages, and create new monetary policy tools to support the stock market.

On September 26, the Political Bureau meeting was held to focus on the economy, deploy the next economic work, and promote the effective implementation of policies.

The continued moves by the two powers are bound to affect the global economy. As the world's small commodity capital and an important window of international trade, Yiwu, this wave of interest rate cuts will bring different degrees of impact on the small commodity industry and the various business entities of Yiwu market.

Five questions to understand the impact of interest rate cuts on Yiwu market

Question 1: After the interest rate cut, what will be the overall trend of the global small commodity industry?

In recent years, the global economy has slowed down due to multiple factors, including the Sino-US trade war, local political conflicts, and the reduction of technological dividends. The bottom line is that the global economy has entered a downward cycle. Throughout economic history, this process has been repeated. In the past hundred years, due to World War II, the energy crisis, the bursting of the Internet bubble and other events, most countries have experienced a long period of economic decline. In the past, because of the special economic system and the insufficient degree of globalization, China did not have the same frequency as this cycle.

However, the impact of the small commodity industry by economic fluctuations is relatively small, the main reason is that most of the small commodities have the attributes of people's livelihood, everyone needs to use, is just needed. The demand for small commodities is less restricted by the political environment and technological development, and the consumption of small commodities in each country is basically related to three factors: population, consumption capacity and consumption willingness.

From the data point of view, in terms of population, the world's total population increased from 7.743 billion in 2019 to 8.047 billion, and maintained a steady growth rate of about 1% per year. In terms of consumption power, the per capita disposable income of Chinese residents increased from 30,733 yuan in 2019 to 39,218 yuan in 2023, an increase of 27.6%. The per capita consumption expenditure of residents increased from 21,559 yuan in 2019 to 26,796 yuan in 2023, an increase of 24.3 percent. It can be seen that the consumption power of Chinese residents is gradually improving.

 

Figure 1: World population, 1919-2023

Source: World Bank

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Figure 2: Per capita disposable income and consumption expenditure of Chinese residents, 1919-2023

Source: National Bureau of Statistics

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Neither population nor consumption power can be changed in the short term; only the willingness to consume can be affected by economic policy.

In both the US and China, the main effect of interest rate cuts on individuals is to reduce the return on savings and boost consumption. The interest rate cut is accompanied by the reduction of the deposit reserve ratio, which is called the release of liquidity in professional points, and simply put, the issuance of money. The central bank's two-pronged policy is designed to boost people's willingness to spend.

It is believed that many countries will implement similar policies. Such a global monetary easing environment will increase liquidity in the market and reduce financing costs, thus stimulating the growth of global consumer demand to a certain extent, and thus driving the increase in the demand for international trade of small commodities. This will undoubtedly be good for the global small commodity industry. From the historical rate cut in each cycle, daily consumer goods, necessities and other consumer industries have significantly improved.

 

Question 2: What is the impact of interest rate cut on Yiwu's foreign trade import and export?

Although both China and the United States are cutting interest rates, the current annual interest rate in the United States is still high and higher than that in China, and there is more room for continued interest rate cuts in the future. So in the long run, international capital flows gradually to China, pushing up the value of the yuan.

The appreciation of the domestic currency is theoretically bad for exports. First, the price competitiveness of products has declined. Because the same amount of dollars will be converted into less yuan, foreign investors will have to pay more foreign currency to buy Chinese goods. Second, local currency income from foreign exchange settlement decreased. For export enterprises, if the foreign currency income received is appreciated in the domestic currency at the time of foreign exchange settlement, the amount of foreign currency conversion will be reduced, resulting in exchange losses.

On the contrary, the appreciation of the domestic currency is beneficial to imports, one is to reduce the import procurement cost of foreign trade enterprises. The same local currency can be exchanged for more foreign currencies, thereby increasing its purchasing power in the international market. Second, we will reduce the external debt burden of foreign trade enterprises. For the import and foreign trade enterprises with an account period or foreign debt, the appreciation of domestic goods can reduce the cost of debt repayment.

From January to July this year, Yiwu achieved a total import and export volume of 379.10 billion yuan, an increase of 18.1%, a total export volume of 335.97 billion yuan, and a total import volume of 43.13 billion yuan, a difference of nearly 10 times. According to the import and export data of Yiwu in the past 8 years, the export volume of Yiwu is far greater than the import.

Figure 3: Exports of Yiwu from 2016 to July 2024

Data source: Yiwu Customs

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Figure 4: Import volume of Yiwu from 2016 to July 2024

Data source: Yiwu Customs

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However, due to the particularity of Yiwu market, it will resist the impact caused by the US dollar interest rate cut. According to the person in charge of the supply chain import and export company of Yiwu Mall Group, there are many factors affecting Yiwu's small commodity exports. First, as mentioned above, the interest rate cut has a stimulating effect on the global small commodity market demand. Yiwu, which occupies an important position in the world's small commodity trade, is naturally good. Second, the export of Yiwu market is mainly in the way of market purchase trade. The export commodities are priced in RMB, so the price of commodities is relatively stable. The price of commodities is generally affected by changes in raw material costs and supply and demand, rather than exchange rate fluctuations. Third, foreign trade enterprises in Yiwu market generally adopt the method of capital pool in fund management, and implement the total amount method rather than single bill and single exchange, so the risk of exchange rate fluctuations is reduced to a certain extent.

 

Question 3: How long will the rate cuts last?

As the world's two largest economies, the important economic decisions of China and the United States will have a global impact. Their fiscal policies and monetary policies are long-term, conform to the overall economic cycle, and are also the embodiment of national strategies. Therefore, the rise and fall of interest rates will not be repeated in a narrow range, but will go through a longer cycle.

From the previous US rate cut cycle, each round of Fed rate cut cycle lasted for months or even years. In the past two and a half years, it has experienced the longest rate hike cycle in history. So it is expected that this round of interest rate cut cycle will last for a long time.

Table 1: Review of the past six rate cut cycles in the United States

 

Data Source: Wind, Yiwu Index

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In the course of previous interest rate cuts, the Fed used multiple rounds of interest rate cuts of 25 to 50 basis points each time to stabilize inflation and employment, so that the financial market did not occur serious crisis and systemic risk.

Therefore, both China and the United States are facing a complex and changing economic environment and global financial dynamics, which makes them need to be fully prepared for the possibility of interest rate reduction policies in the long run. This preparation is not only a response to current economic conditions, but also a forward-looking layout for potential economic challenges in the future.

 

Q4: How should the small commodity enterprises in Yiwu respond?

Through the long-term follow-up of Yiwu Index to market operators, this paper discusses the countermeasures of US dollar interest rate cut from its perspective.

Yiwu International Trade City's main export Middle East hardware products operator said: "Interest rate cuts mean the depreciation of the US dollar, the appreciation of the renminbi, our foreign trade industry with the US dollar settlement is sure to have an impact, some foreign investors, especially old customers to place orders will have more consideration." However, in recent years, when communicating with foreign investors, we would suggest that the other party use RMB settlement, and we basically use RMB pricing, and some old customers have also been used to RMB settlement."

A person in charge of a foreign trade company in Yiwu that mainly exports to South America said: "We have also noticed that the US dollar has significantly cut interest rates, which may lead to the depreciation of the US dollar affecting trade exports." However, we will take some measures based on past experience to deal with it. For example, we may lock in some future orders with large exports to prevent exchange rate fluctuations. The impact of the US dollar rate cut on foreign trade is still under continuous observation, and we have relatively strong confidence in the export of foreign trade in Yiwu market as a whole."

There are many businessmen in Yiwu, large and small, who do foreign trade, and the perception of the Fed's interest rate cut is different. How should the foreign trade enterprises in Yiwu market properly deal with the interest rate cut? To sum up:

Foreign trade enterprises should pay close attention to the trend of exchange rate fluctuations and avoid foreign exchange settlement when the exchange rate fluctuations are large. From the trend of the exchange rate between the US dollar and the RMB in the past two months, the exchange rate between the US dollar and the RMB is in a downward trend, falling from the highest 7.28 to about 7.08, of which the largest drop of 1.16% on the day. In addition, reasonable use of fund management strategies, including capital pools, to avoid profit loss due to exchange rate fluctuations.

Figure 5: Chart of the exchange rate of USD against RMB from July to October 10, 2010

 

Data source: Baidu Stock Connect, Yiwu Index

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For foreign trade enterprises with fast turnover of capital demand, flexible adjustment of foreign exchange settlement strategy, including the use of forward settlement and sale of foreign exchange, will minimize the impact of exchange rate fluctuations.

 

Q5: What is the future of China's export trade?

Investment, consumption and exports are often figuratively referred to as the "troika" that drives economic growth, but from the data performance of the "troika" in the past few years, the power point of China's economic growth has changed to a certain extent.

In terms of investment: the growth rate of the national total fixed asset investment is weak, from 5.5% in 2022 to 3.0% in 2023, and the growth rate from January to August 2024 is only 3.4%. Over the past years, the "iron Gong-based" driving model is facing transformation.

In terms of consumption: The retail sales of consumer goods fluctuated greatly. In 2022, the total annual retail sales of social consumer goods in China reached 43,973.3 billion yuan, with a growth rate of -0.2%, and the growth rate recovered to 7.2% in 2023. But consumer confidence remains weak.

 

Figure 6: Total retail sales of consumer goods in China, 1919-2023

Source: National Bureau of Statistics

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In terms of exports: In the past five years, China's exports have been in a relatively high growth state. From this year's data, in the first eight months of 2024, exports reached 16.45 trillion yuan, an increase of 6.9%, and Yiwu's exports increased by about 18%.

Figure 7: China's export volume, 1919-2023

Data Source: China Customs, Yiwu Index

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The performance of exports in China's economic troika is not uncommon in the history of global economic cycles.

For example, Japan, Asia's second-largest economy, started its bubble in December 1986 and was in recession for nearly a decade, but exports continued to grow during this period, becoming one of the few bright spots.

Figure 8: Growth of Japan's exports from 1987 to 1997 (in USD billion)

Data Source: World Bank, Yiwu Index

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2023 is known as the "first year of the brand going to sea" in China, in today's economic situation, the enterprise going to sea has become a required question from the past, and has also become an important strategic choice for Chinese enterprises. The expansion of Chinese goods into the global market has gradually become a new driving force for China's economic growth.

As the center of the world's small commodity trade, Yiwu has the role of a weather vane of international trade, leading the trend of global small commodity trade, and becoming a link connecting small commodity trade around the world.

In the new round of economic cycle, Yiwu will also show its strong resilience and vitality in the complex and changeable international environment, and play a more important role in global trade with its unique status and advantages.