2014-03-31

PBOC Shuts Down Stimulus Talk

The PBOC puts the kibosh on the reserve requirement cut talk. It isn't happening, at least not yet. The bank will stick with open market operations and stay the course on the deleveraging process.

Out this afternoon in China:
Li Warns of Risks as Yields Drop Most Since Lehman: China Credit
Premier Li’s warning, given at a meeting last week, that China can’t ignore the dangers of increasing downward pressure on the economy has spurred bets the government will roll out measures to stabilize growth as indicators such as manufacturing signal a slowdown. As part of the initial steps, the People’s Bank of China may cut lenders’ reserve requirement for the first time since May 2012, according to Credit Suisse Group AG and Nomura Holdings Inc.

That is typical of the stimulus talk going around.

This was posted a couple of hours earlier on "Chinese Financial News," a PBOC publication: 中国经济需要“降准”来刺激吗 (Does the PBOC need to stimulate the Chinese economy with rate cuts?)
To lower or not lower the deposit reserve ratio? Currently described each see different views.

Advocated "RRR" by two reasons:

First, the new foreign exchange 128.246 billion yuan in February, not only significantly reduced compared with 309.1 billion yuan in January 437.366 billion yuan, also hit a new low since last September. In particular, since March 17 RMB exchange rate volatility expanded from 1% to 2%, the RMB spot rate bidirectional intraday volatility and depreciation is expected to increase. Some people worry that the continued depreciation of the RMB will lead to hot money inflows power weakened, slowing growth in foreign exchange. "If a month or a month or two of negative growth in foreign exchange occurs, the central bank must lower the deposit reserve ratio." Idea that.

The second is from 1 to February data show a significant slowdown in China's economic growth momentum. Performance of China's industrial added value growth rate declined from 9.7% in December last year to February this year, from 1 to 8.6 percent, the lowest in five years; social consumer goods retail sales growth fell from 13.6% in December last year to a ~ February's 11.8 percent, the lowest in nearly 10 years; urban fixed asset investment up 19.6% from last year's growth rate fell to 1 to 17.9% in February, the lowest in nearly 12 years; 1 to 2 months the national total electricity the amount of accumulated 824.3 billion kwh, an increase of 4.5%, lower than last year by 1 percentage point. The latest HSBC in March China's manufacturing purchasing managers index (PMI) fell to preview data is 48.1%, the highest eight-month low. Economic data is not to force, so many economists believe, must adopt a new round of economic stimulus. The lower the deposit reserve ratio, continue to turn on the water, seems to be one of the best choices.

Argument against "drop quasi" who is also very good: the experience of the last few years has repeatedly proven, monetary policy stimulus effect on the economy is not sustainable and are getting shorter. For example, the policy began in the spring of 2012, to relax, only about one year to support the economic rebound in 2013 after a significant slowdown in the economy began in the spring. While easing the summer of 2013, only a period of less than six months to support the economic rebound. Moreover, lowering standards and credit expansion is difficult to stimulate the economy, structural imbalances will actually worsen even make the asset price bubble continues to inflate.

Appear diametrically opposite view is not surprising. Whenever the Chinese economic slowdown, CPI decline economists out there, "RRR" prescription. So last year, this year is no exception.

In fact, you do not "drop quasi", the first to look at the tight liquidity in the banking system is not tight, followed by watching "RRR" There is no use, how far-reaching effects.

In the former case, the current "volatility of money market interest rates remain downstream market, the overall liquidity of the banking system is more moderate." On the open market, after seven weeks, the central bank in the open market funds were net return of 48 billion yuan, 40 billion yuan, 70 billion yuan, 160 billion yuan, 108 billion yuan, 450 billion yuan and 98 billion yuan, the overall return of moderate intensity, Each term interbank interest rates low for the overall market, although a slight rise in interest rates at the end, but the banking system liquidity is not unusual due to exchange rate fluctuation of RMB. Even if individual banks strapped for cash, that is the structure of a single bank liquidity is a problem, not the overall liquidity in the banking system caused by tension. Maintaining banking system liquidity "moderate" will help "keep the economy running at a reasonable range."

In the latter case, "RRR" (such as 0.5 percentage points), although the release of 515 billion yuan currency can (in January deposits 103 trillion yuan terms), but released mobility (according to five times the money multiplier calculated theoretically derived market liquidity will magnify 2.575 trillion yuan), where the flow is a problem. Currently, the downturn in the real economy, capital requirements are not strong, shouting money is either capital-intensive housing prices, either need to borrow new-old, dependent on credit alleys overcapacity enterprises, either infrastructure projects of local government investment . If the "RRR" release liquidity, eventually went to these places, the result is nothing more than house prices continue to rise, continued excess capacity, local government debt ratio continued to climb. This is not only conducive to China's economic restructuring, will run the risk of increasing Chinese economy.

From the current attitude of the monetary authorities of view, the monetary authorities on the one hand continue to increase open market operations, by 14 and 28 day repurchase operations, modest efforts to improve hedge deeper locked mobility; hand officially support the re-credit policy support the creation of a small loan category under refinancing designed to support financial institutions to expand credit small and micro enterprises, while supporting small and then issued a nationwide total of 50 billion yuan credit line. This combination of monetary policy operations, revealing what information?

It may be recalled in 2013 fourth quarter monetary policy report of such a statement: "The central bank will continue to implement prudent monetary policy, while in the background of the rapid development of financial innovation, regulation and guidance role of liquidity gate is more important to rational use of various tools combination of open market operations, reserve ratio, then loans, manage and regulate the banking system liquidity, stability is expected to promote the smooth operation of the market interest rates. "Here, although the central bank clearly lists the" open market operation, the deposit reserve ratio, re-lending, "the three tools of monetary policy, but in order to better play" control gate and the guiding role of liquidity, "the central bank is still the most frequently used is more flexibility, accuracy of publicly market operations, complemented refinancing and other monetary policy tools alone "RRR" tool did not use.

Why not to use the "RRR" tool?

On the one hand, the use of "RRR" tool will make the market began to loosen monetary policy misjudgment signal, which not only does not meet the "mobility gate control and guidance" target, does not conform to the government work report identified "Monetary policy should remain moderate tension, and promote basic balance between total supply community, and create a stable monetary and financial environment" policy orientation.

On the other hand, compared with the use of "RRR" tool, the monetary authorities now seems more inclined to "blending into the reform in the regulation." January 20 this year the central bank in Beijing, Jiangsu, Shandong, Guangdong, Hebei, Shanxi, Zhejiang, Jilin, Henan, Shenzhen, convenient to carry out the operation of pilot standing lending branches to meet the requirements of small and medium financial institutions to provide short-term liquidity by the central bank support, to March 21, the central bank in the credit policy to support the creation of supporting small refinancing refinancing category, the central bank has always attached great importance to monetary policy combined with the deepening of reform, the double combination through regulation and reform, the fluidity to be more precise delivery to make monetary policy operation means richer, so that the macro-control effect more pronounced, and more stable monetary and financial environment.

Currently, the Chinese economy's dependence on investment and debt rising, the potential risk of economic and financial areas of concern. In this context, continue to "RRR" will delay the deleveraging of financial institutions and corporate processes, the impact of China's economic structure was further optimized. For this reason, it is necessary to continue to adhere to the "total stability, structural optimization" policy orientation. But to adhere to the "total stability, structural optimization" policy orientation, we must make greater use of open market operations, refinancing and other tools to facilitate the standing lending portfolio is expected to strengthen the guidance, strengthen regulation of proactive, targeted, synergistic, overall steady growth, adjusting structure, promoting reform and anti-risk, continue to create a stable monetary and financial environment for structural adjustment and restructuring and upgrading. Unless the United States to reduce the size of the debt purchase, QE exit too fast, causing the total liquidity of the banking system changes, thereby enabling the micro-economy capital chain tension, increasing systemic risk, the risk of stalling the Chinese economy, otherwise the operation of monetary policy remains open market operations will continue to be dominated.

No comments:

Post a Comment