Niru Devani's view
China announced a combination of tax cuts and infrastructure spending late yesterday to boost growth. The fiscal measures are another sign that the authorities are worried about how the trade war with the US will exacerbate a weakening domestic economy. External “uncertainty” was cited as one of the reasons for the stimulus measures. At the same time, the authorities are keen to allay concerns that China is abandoning structural reform which would damage its credibility on the international stage that it has worked hard to build.
Additionally the People’s Bank of China added $74bn into the banking system via its Medium-term Lending Facility. This was the largest single injection of cash using this facility. The PBoC’s loans are in addition to other measures including a cash injection of about Rmb700bn in late June, when it reduced the reserve requirement for banks. This was aimed at freeing up capital that banks can use for lending and investment and boost the money supply. Money supply and credit expansion have been slowing in recent months.
The actions of the People’s Bank are a strong indication that the authorities are moving to ease monetary policy. The economy has slowed with housing growth and infrastructure spending decelerating and the escalating trade war with the U.S. poses a further risk to growth. China’s economy grew at 6.7 per cent in the second quarter, its slowest pace since 2016. Although second-quarter growth was only 0.1 percent lower than the previous three quarters, the full effect of the measures to control rampant debt growth has yet to be felt and clearly the authorities are being pre-emptive.
Policymakers have a tough job on their hands trying to control runaway debt growth yet at the same time, promoting short-term growth and ensuring that the currency does not depreciate too rapidly.
Their measures have had a positive impact on the Chinese equity markets, the price of copper and the mining stocks. The China A-Shares index rose by 1.6% and appears to have found short term support. Copper also regained some composure following sharp falls recently. It rose by around 2.75%. However, the Chinese Yuan fell further and this is a headache for the authorities as it has fallen far too quickly since the high at the end of March. Whilst it makes Chinese exports more competitive and may help to offset some of impact of tariffs imposed by the US, it can also trigger capital outflows and the authorities do not want that. The memories of capital flight on the scale we saw in 2015/2016 are still fresh in their minds.Back to top