After spending the better part of a year engineering a series of overlapping crises in the name of long run stability, China is now pivoting to easier monetary policy in the interest of near-term stability.
I’m not sure “ironic” is the right word. Often, laying the groundwork for achieving long-term goals entails suffering of some kind in the here and now. At the least, it typically requires forgoing decadence today in the name of ensuring tomorrow is safe, comfortable and generally secure.
If you overshoot, though, the present can become uncomfortable or even intolerable, at which point a rebalancing is required. After all, a stable tomorrow isn’t much use if you die today.
In that context, China’s burgeoning policy pivot is just the natural way of things and it’s also a manifestation of Xi’s penchant for underestimating capital markets’ propensity to overreact. Of course, he’d probably argue that to the extent capital markets are mercurial and prone to irrationality, that’s just one more reason to distrust them. But I digress.
On the heels of Monday’s RRR cut, the Securities Times said the PBoC also lowered the relending rate for SMEs by 25bps, effective immediately. Relending is yet another lever the PBoC can pull in an effort to provide targeted support and avoid the kind of broad-based easing seen as conducive to bubbles and speculative excess. It’s aimed at the rural sector and smaller firms and it’s expanded materially over the past half-decade.
Just as the RRR cut was accompanied by the customary language insisting China isn’t going to “flood” the market with liquidity, the Securities Times (which is state-run, of course) was keen to emphasize that lowering relending rates isn’t tantamount to policy rate cuts. “When observing the policy orientation, we should pay attention to whether the interest rate has changed, not the relending rate,” the article, dated Tuesday, said.
Nevertheless, the combination of the RRR cut and the relending move suggest Beijing wants to put a floor under the economy, lest the bottom should fall out. “The Politburo meeting and a trio of easing initiatives confirm countercyclical easing is underway,” Morgan Stanley said Monday, after the RRR cut but prior to the relending news. In addition to the RRR move, “housing financing conditions have improved gradually amid policy support and local media reported that real estate loans have increased in November,” the bank’s Robin Xing and Jenny Zheng went on to say, adding that together, “these factors suggest the credit impulse has already bottomed and could start to rebound from November.”
The relending cut, the first since July 2020, only underscored the point. Officials are obviously worried about the economy, and the emphasis is shifting from the regulatory crackdown to supporting growth, Macquarie wrote, citing Politburo messaging and the RRR cut. The bank sees monetary and fiscal policies pivoting looser over the next several months, although they were careful to note that any easing is likely to be piecemeal and measured. It’s probably too early for the relaxation of curbs on housing and local government debt.
“The Politburo policy-tone adjustment signaled clearly that the senior leadership has recognized downward pressures on the economy,” UBS said, in their assessment. Despite emphasis on “prudence,” the RRR cut “in fact sends a clear signal of monetary policy easing,” the bank went on to write.
For their part, SocGen’s Wei Yao and Michelle Lam expect more easing. “The signaling and implementation of [the] RRR cut was a surprise to the markets, but not to us,” they wrote, on the way to reiterating that on their view, “eased supply constraints are no offset to decelerating demand caused by housing, and marginal tweaking (including relaxations to property funding) is not enough to cushion the slowdown in the broader economy.” Although a single RRR cut “is far from enough to resolve any of the downward pressure on China’s economy, we believe it could open the door to other, more impactful easing measures,” the bank suggested.
Meanwhile, a report published on the WeChat account of Financial News Tuesday insisted that “the liquidity to be released from the RRR cut announced Monday is ‘controllable’ and the amount is moderate.” It continued: “The RRR cut doesn’t mean a shift in PBOC’s prudent monetary policy stance.”
I see the narrative that the “overlapping crises” are manufacture, which would mean the challenges are a pre-meditated strategy to ostensibly reset the “excesses” of capital markets. It makes sense, it’s a straight forward read on the situation. But I don’t believe the narrative to be true.
I see the recent policy, tightening into a slow down, as reactionary, a panicked and forced reaction. It tells me that China is hyper sensitive to higher interest rates. With all the recent articles about how the US financial system cannot digest persistently high interest rates, China’s interest rate problem is far more acute.
My other take away is that Xi and the party know how bad the real estate bubble is, from the inside. They know a lot more than we do. More and more, Evergrande is looking to be the Bear Sterns moment of the in-process collapse of the Chinese real estate market. Now that I’m old enough to have lived through a few market crashes and having studied it; crashes play out over time until it’s too late and then the crash gets reflected in everything as contagion sets in.
Xi’s panicked reaction is an attempt to forestall the inevitable. This while putting lipstick on a pig so that Xi can now blame the “capitalist pigs” for the Chinese economy crashing some time next year.
The best laid plans often go awry. We will see what we see. Maybe the credit impluse is turning or maybe policy is still too tight and who knows whether you can actually make a transition from a property dominated one to one driven by investment in green energy…Such transitions would seem rather difficult without encountering bumps in the road…