Just one business day after Premier Li Keqiang tipped incremental policy easing aimed at bolstering smaller firms, the PBoC pulled the trigger.
China cut the reserve requirement ratio for most banks by 50bps, effective December 15. The last cut was in July.
Typically, the market doesn’t have to wait long for a move following official nods to freeing up liquidity in a bid to lower financing costs. July’s move came just two days after the State Council telegraphed action.
I should note that the green dots in the figure (below) show the assumed new levels for major and small banks based on where RRR was prior to Monday’s reduction. Sometimes, it’s difficult to tell precisely how these moves will be implemented in the first few hours after the announcement, although the PBoC described the cut as a “comprehensive reduction.” It’ll free up some 1.2 trillion yuan in liquidity.
The PBoC was keen to avoid the impression that China is embarking on any kind of easing campaign. “The orientation of prudent monetary policy has not changed,” the bank said, adding that the RRR cut is a “regular operation of monetary policy.” Some funds released by the move will be used to pay maturing MLF which comes due the same day the cut goes into effect.
The world’s second largest economy is facing gale-force headwinds. Regulatory actions associated with Xi’s “common prosperity” push weighed heavily on market sentiment throughout the summer and continue to bedevil China’s largest tech companies. Beijing’s property curbs, meanwhile, pushed a hodgepodge of developers to the brink. The country grappled with an acute power crunch in September and October, which threatened to stymie industrial output even as global demand for manufactured goods remains voracious. At the same time, the Party’s “zero COVID” strategy suggests rolling lockdowns will be a fixture of life for the foreseeable future.
All of that said, the latest activity data showed retail sales and industrial output stabilizing (figure below).
To the extent you trust the numbers, it’s possible the most acute phase of the slowdown is over, assuming the property sector doesn’t experience an outright meltdown tied to Evergrande’s (apparently imminent) restructuring.
Chinese monetary policy remained generally neutral following the initial pandemic response. The PBoC didn’t chase developed market central banks down the accommodation rabbit hole. In fact, Chinese policymakers warned their developed market counterparts that too much accommodation was risky.
Now, though, waning economic momentum could force the PBoC to pivot dovish just as the Fed and other developed market monetary authorities are attempting to roll back stimulus. As usual, the bank downplayed the notion that incremental easing is indicative of a shift in the overall policy stance. “The People’s Bank of China will continue to implement a prudent monetary policy, adhere to a stable policy, avoid flooding [the economy with liquidity], take into account internal and external balances and maintain the growth rate of money supply and social financing scale to basically match the nominal economic growth rate,” a separate statement read.
Li’s RRR remarks last week came as the Chinese Premier met with the IMF’s Kristalina Georgieva. “We believe the deterioration in China’s property sector is the biggest concern for both the IMF and financial markets,” ANZ’s Zhaopeng Xing said. “China wants to reassure the IMF that it has the ability to address the financial risk of its real estate sector.”
Commenting on the RRR cut, Credit Agricole’s Eddie Cheung called the move “another shift from authorities to show they’re supporting growth.”
Really, though, it’s just a liquidity management exercise. And the PBoC seems more than happy for markets to interpret it as such. There’s no appetite in Beijing for bubbles and any easing measures will be taken in a manner that allows officials to insist the de-leveraging campaign is alive and well.
Chinese bonds rallied the most in some five months Monday.
One thing that intrigues me. In China, if nowhere else, couldn’t the government intervene directly on the economic actors to force their leverage ratio to a “sustainable”/prudent level (whatever you deem that level to be, per industry, given historical volatility of economic conditions in that industry)?
In the free world, such direct interventions are usually frown upon and authorities are forced to either wait for “bailout” conditions and/or use less than perfect tools such as prudential ratios etc. with plenty of significant actors avoiding such regulations…
… but I have the naiveté of thinking that, should we be able to do so, the Fed/the authorities could impose ‘proper’ leverage on actors as, partly, a better way of managing liquidity than having to rely on interest rates and bond buying programs.