China is not rushing to roll out broad-based monetary stimulus, even as growth slows and the effects of the trade war continue to manifest themselves in lackluster economic outcomes.
The revamped loan prime rate – published each month on the 20th – was left unchanged in October, against expectations for another small reduction.
As a reminder, China moved to simplify its two-track rate regime this year in a bid to bring down average borrowing costs. That effort culminated in a new LPR compiled from 18 bank submissions representing the prices they charge their most credit-worthy clients expressed in basis points over open market operation rates, with an emphasis on the medium-term lending facility. LPR fell in September and also in August, the first month using the revamped calculation.
Read more on the LPR: China Releases First Revamped Loan Prime Rate, Ushering In New Interest Rate Regime
But, not this month. Rather, the rate was kept at 4.2% and the five-year tenor was similarly unchanged at 4.85%. Analysts had been expecting a 5bps cut.
This sounds hopelessly mundane, but it really is some semblance of notable, especially on a day when the news flow was relatively light overseas. Although the revamped LPR is informed by submissions from 18 banks, the PBoC can steer it, just like Beijing can steer everything else. The fact that they didn’t suggests China is being especially judicious about how and when they fire their bullets.
Last week, one of two targeted RRR cuts went into effect and another will kick in next month. Those two targeted easing efforts were announced alongside the latest broad RRR cut early in September. The across-the-board reduction went into effect on September 16.
Days before China reported the slowest growth in three decades, the PBoC injected a surprise $28 billion in liquidity. The 200 billion offered through MLF last week came even as the next wave of maturities is still weeks away. That suggests Beijing is looking to keep the wheels greased with longer-term liquidity.
As noted on Friday, China may well cut the MLF rate when some 400 billion yuan in loans come due next month. That would pave the way for the new LPR to fall later in November.
For now, though, the unchanged LPR print pushed up money market rates and helped drive 10-year yields to the highest in months.
“China’s policy makers are preparing for two key meetings in the coming weeks with fresh evidence that sooner rather than later, the number for gross domestic product growth will start with a 5”, Bloomberg writes on Monday.
At the IMF meetings last week, PBoC boss Yi Gang emphasized the importance of keeping leverage and debt at bay.
His comments, Bloomberg goes on to note, “may set the scene for a meeting of the Politburo and the ensuing Fourth Plenum of the Party’s Central Committee [events which] could produce a shift away from the current targeted, moderate stimulus regime”.
And yet, China continues to slow-walk things on the stimulus front, as Beijing appears poised to tolerate slower growth and rising defaults in the interest of avoiding credit bubbles and other destabilizing eventualities.
“Our China economics team developed a measure of China’s overall domestic economic policy stance, and noted that the policy mix in the current cycle has become more cautious with regard to domestic stimulus, with more tolerance for currency depreciation”, Goldman writes, in a note dated Monday. “To us, this is an indication that policymakers are seeking to avoid a return of the credit boom that we saw in the years following the Global Financial Crisis”.
Indeed, it may well be that tolerating higher defaults and allowing for market forces to purge some misallocated capital is the best way to set the table for an eventual return to higher growth – only on more stable footing.
“A combination of low GDP growth and lukewarm broad inflation indicates the clear fall in the trend growth level which can only be reversed by pro-market reforms given the continued headwind from demographic changes”, Goldman goes on to say, adding that “a key area of reform is the continuation of the credit cleanup, as reflected by the slowdown in credit growth over the past two years and a rising trend in credit defaults.”
The bank also cites the Baoshang takeover and the cancellation of a Tier 1 dividend payment by Bank of Jinzhou as possible examples of authorities’ desire to “introduce credit differentiation not just in the corporate sector, but also in the financial sector”. That, of course, plays into the broader effort to rein in shadow banking and the rampant proliferation of unproductive credit growth.
All of this suggests that those waiting on a concerted stimulus push out of Beijing or for China to otherwise ride to the rescue when it comes to ensuring the global cycle doesn’t turn shouldn’t hold their breath.
The fact that stimulus has been rolled out only gradually is also a testament to China’s resilience in the face of immense pressure from Washington.
Contrary to Donald Trump’s Twitter balderdash, there is no “panic” in China. There is just a maddeningly slow drip of stimulus that continues to frustrate those hoping to see the reflation narrative revived on a global scale.