Following the release of the quarterly monetary policy report from the People’s Bank of China, it is becoming clear, as Goldman Sachs notes, that stimulus – via cuts to system-wide RRR and/or benchmark interest rates – is becoming less and less likely. The PBOC's introduction of a new facility called the medium-term lending facility (MLF) allows 'targeted' easing, and as one local economist noted, "it shows the central bank is very reluctant to loosen monetary policy." The PBOC has broadened its toolkit to arrest an economic slowdown, while seeking to avoid adding financial risks, as The PBOC said it would "continue to implement a 'prudent' monetary policy and use various tools to manage liquidity." Not the exuberant stimulus-fest the talking-heads are calling for reminding us, as Pettis previously concluded, "In China, it will be no different. Growth miracles have always been the relatively easy part; it is the subsequent adjustment that has been the tough part."
The People’s Bank of China confirmed it pumped 769.5 billion yuan ($126 billion) into the country’s lenders in the last two months through a newly-created Medium-term Lending Facility. The PBOC injected 500 billion yuan in September and another 269.5 billion yuan in October via the facility — all termed at three months with an interest rate of 3.5 percent.
The announcement, included in the PBOC’s quarterly monetary policy statement, is the first official confirmation of earlier reports on the injections. Goldman Sachs Group Inc. said every 500 billion yuan in funds from the central bank is similar to a 50-basis-point cut in the required reserve ratio.
“It shows the central bank is very reluctant to loosen monetary policy, but it has to reduce financing costs for end borrowers,” said Guan Qingyou, chief macro-economic researcher with Minsheng Securities Co. in Beijing. “It doesn’t mean the new tools can replace traditional tools forever.”
The operations “affected mid-term interest rates while providing liquidity to guide commercial banks to lower their lending rates and overall social-financing costs,” the central bank said in the report published yesterday. “As liquidity generated from capital inflows eases, MLF has played a role of covering the liquidity gap and maintaining a neutral and appropriate liquidity situation.”
And as Goldman Sachs explains,
China: The PBOC’s Q3 monetary policy report revealed refinements to the monetary toolbox, but provided no indication of any major change in policy stance.
The quarterly monetary policy report from the People’s Bank of China revealed that the central bank had introduced a new facility called the medium-term lending facility (MLF) to inject large-scale liquidity (with a 3-month tenor) in September and October. This was intended in part to guide medium-term interest rate expectations but also as an offset against slow FX inflow. Compared to the Q2 report, there were no major changes in the language related to policy outlook. We do not rule out the potential for high-profile actions, such as cuts to system-wide RRR and benchmark interest rates, but continue to believe the probability of such moves is lower compared to further targeted easing.
The Q3 monetary policy report used largely the same language as in the previous report regarding the PBOC's policy stance (i.e., maintaining a stable monetary policy). But it gave more color on the methods that the central bank has deployed behind the scenes to ease financing conditions. There have been media reports that suggested large-scale PBOC injections in September and October. This monetary policy report clarified that the injections totaled RMB770bn, and were made through a new facility called the MLF to various commercial banks (including state-owned, share-holding, large city banks and some rural banks) that satisfy (unspecified) prudential requirements. The liquidity carried a 3-month tenor at 3.5% interest rate (in comparison, 3-month SHIBOR was about 4.5% during the period). The facility is intended to guide interest rate expectations as well as to offset the recent slowdown in FX inflow. It is not entirely clear how the MLF in practice differs from the SLF (Standing Lending Facility) that was introduced early last year, but one likely distinction is that the former appears to be initiated by the PBOC while the latter is supposedly initiated by the banks themselves.
Other than the liquidity injections, the report mentioned that the PBOC has also lowered the interest rate charged on the PSL (PBOC loans to finance shantytown redevelopment) since September in another attempt to guide market interest rates lower. In addition, the central bank has been actively utilizing the long-standing dynamic RRR arrangement to lower RRR for individual banks, based on their capital ratio and loan allocation (those that lend more to the agricultural sector and small/micro enterprises benefit more).
With all these policy maneuvers, long-term bond yields have been falling significantly in the past couple of months. Even bank lending rates have also declined. The report indicated that the weighted-average bank loan rate edged down by 12bp from August to 6.97% in September (although still 1bp higher than the June level that the Q2 report indicated). Similarly, average residential mortgage rate also fell 5bp from August to 6.96% in September (although still the same as the June level). Interbank liquidity was also kept relatively loose, with excess reserve ratio rising to 2.3% in September from 1.7% in June.
Lastly, while not dismissing the option of high-profile actions, such as system-wide RRR cuts and reduction in benchmark interest rate, the report cautioned in a couple of places against “turning the water tap wide open” and emphasized the need for maintaining a flexible policy stance.
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The CNY fixing is now at its weakest in 2 months as it appears reaction to the end of QE and the BoJ's surge pushed the PBOC to shift trend…
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Allison Nathan: Given how daunting some of these challenges seem to be, is China heading for a hard landing?
I think the soft landing/hard landing debate misrepresents the structure of Chinese growth.
China’s options are not a soft landing of 6-7% growth for the rest of the decade or a hard landing of growth below 5%.
The real choice is between either what I call a long landing, in which growth drops on average by roughly 100 to 150 bps per year, or a soft landing followed by a very hard landing.
The long landing scenario requires that the reforms be implemented reasonably quickly, because we may only have another three or four more years before we run out of debt capacity, but not disruptively. A long landing won’t be easy and it will require political skill at playing off the different interests, but it would be orderly. And while annual growth rates in this scenario wouldn’t average much above 3-4% during President Xi’s administration, rebalancing means household income growth would be higher, and so the decline in the income growth rate of ordinary Chinese wouldn’t be anywhere near the decline in overall GDP growth rate.
If, instead, we have what everyone would hail as a soft landing, with growth remaining above 6-7% for another two years, it would just mean that credit was still growing too quickly. And once we reach debt capacity constraints, the so-called soft landing would be followed by a very brutal hard landing.
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