For a septuagenarian, Donald Trump was up late on Friday evening.
Just after 11 PM that night, the president tweeted about Chinese monetary policy.
“China just enacted a major stimulus plan. With all the Tariffs THEY are paying to the USA, Billions and Billions of Dollars, they need it!”, he screamed at his 64 million Twitter followers, many of whom would have been just fine with coasting into the weekend without another random presidential proclamation.
Read more: What To Know About China’s RRR Cut
Never let it be lost on you that no matter how many times the president insists Beijing (or “they”) is paying the tariffs, it still isn’t true. “They” cannot possibly “pay the USA” a tariff, because that’s just not how tariffs work.
Trump has repeatedly insisted that the devaluation of the yuan (which China only countenances to a point, before pushing back to avert a slide steep enough to catalyze capital flight) and various measures by the PBoC to ensure ample liquidity, amount to Beijing “paying” for the tariffs. He has never explained how that computes, probably because he doesn’t have to – the base doesn’t care whether it’s true or not.
The reality of the situation is pretty straightforward. The trade war has piled more pressure on China at a time when Beijing was already walking a tightrope between deleveraging and keeping credit flowing to the real economy, while simultaneously attempting to internationalize the yuan and transition from smokestack growth to a more sustainable, consumption-oriented economic model.
In light of the pressure from Trump, Beijing has let the yuan fall in accordance with market forces until it reaches levels deemed inconsistent with stability, at which point the PBoC steps in to arrest the slide (they did so in August of 2018 with a four-pronged approach that included the reintroduction of the counter-cyclical adjustment factor and again last month by leaning hard on the CCAF to set the daily fixes much stronger than estimates). The depreciation has cushioned the blow from the tariffs, and multiple RRR cuts and targeted easing measures have been deployed in an effort to support growth without “flooding” the system with the kind of liquidity that might inflate dangerous bubbles.
Friday’s RRR cut (to which Trump was likely referring) was a step down the road to broad-based, headline easing. There’s a targeted element to it, but the 50bp across-the-board cut accounts for 800 billion yuan of the total 900 billion in liquidity released by the move.
The RRR cut was telegraphed at a State Council meeting earlier in the week, and as noted shortly after it was announced (see the “read more” post linked above), Beijing will almost surely follow it up with a cut to the MLF rate, which will mechanically mean a lower new loan prime rate. (The first print for the revamped 1-year LPR was 4.25%, and it should gradually drift below the benchmark lending rate and down towards the MLF rate over time.)
So, if Trump is already irritated with China’s most recent easing efforts, he’ll likely be even more flustered soon enough. It’s just a matter of timing.
“We think the liquidity injection of CNY800bn through a blanket RRR cut could partially offset the liquidity drain of the tax payment in mid-September and expected front-loaded LG special bonds quota in Q4”, Barclays wrote Friday, on the way to cautioning that the move is likely to lend only “limited support to credit growth” which the bank expects to “moderate further in coming months”.
For the bank’s Jian Chang, the preemptive RRR cut (ahead of August activity data and the Q3 GDP print due next month) may allow Beijing to put off the MLF cut until the fourth quarter.
“The potential windows for MLF rate reduction would be on 5 November, and 6 or 16 December when the MLF matured”, Barclays says, adding that although “the State Council meeting (4 September) and Financial Stability and Development Committee meeting (6 September) sent a more dovish monetary policy signal, we think the RRR cut serves as a partial substitute for lowering the funding costs for banks, reducing the probability of an MLF rate cut in September”. Additionally, it’s possible that the banks which contribute quotes to the monthly LPR print can themselves push it lower.
Still, Barclays isn’t willing to completely write off the possibility of an MLF cut the day before the Fed decision. “We think [an] earlier MLF rate cut on 17 September cannot be ruled out if August activity data (16 August) deteriorated sharply”, the bank says.
If August’s disappointing export data was any indication, Beijing can’t afford to wait around too long, especially as the PBoC’s global counterparts ease.
“The obvious option for the PBoC to lower real interest rates is to lower MLF rates first, possibly around the next Fed rate cut in mid September [and] then cut the benchmark deposit rate by 25 bps before the end of 2019”, BofA said late last week. “Otherwise, our worry is that if the central bank continues to drag its feet in domestic adjustment in financial conditions, there will be limited room for exchange rate depreciation going forward, as other central banks are racing to lower interest rates”.
The sooner the better, it would appear.
And when it comes, it will be much to the chagrin of a certain “tariff man”, who knows a thing or two about a central bank “dragging its feet”.