February 19, 2019
There is a widespread expectation among western investors that China will enact quantitative easing to counter the effects of the trade war and the slowing economy. This is highly unlikely. Although there is substantial data indicating signiDcant pain in the economy, including defaulting SMEs, unemployment, and general declining economic activity, the policy statements and actions from the leadership suggest Beijing is intent on avoiding an open-ended stimulus package. They are doing this due to concerns about debt, inefDcient use of credit, and over-use of monetary policy for stimulus purposes.
Fine-tuning the policy response
The actions so far are targeted at specic areas of the economy as opposed to widespread loosening. These include:
- Perpetual bonds.
- Swaps: The creation of central bank bill swaps, which banks can exchange for PBOC paper.
- SME loans: CBIRC suggested targeted loans to private firms, which are supposed to compose
one third of new loans of large banks, two thirds of new loans of small banks and no less than
50 percent of new loans in the whole banking system after three years.
- Local bonds: 2019 Quota RMB 1.39 trillion.
- Tax cuts: Approximately 1.3T
- Increase in the fiscal deficit: This equates, however, to a relatively minimal increase of around
RMB 300 billion (including other forms of deficit, such as bonds).
- The TMLF will have a maturity of one year, but banks can roll loans over twice, increasing the
maximum maturity as long as three years, the central bank said. The one-year interest rate on the TMLF will be 3.15 percent, 0.15 percentage point lower than the rate on the medium-term lending facility (MLF).
Many of these stimulus measures do not have a Dxed amount but are dependent on usage by the banks. By our rough estimate, they would supply roughly Rmb4.1 trillion to the economy.
The deeper issues – local fiscal problems and the property market
The bigger issue is that the de-risking measures so effectively implemented by the PBOC and other Beijing institutions have failed to address two problems:
- The unstable local fiscal economy.
- The continued importance of the property market to growth.
Both of these areas have relied increasingly on financial intermediation through the shadow market, which has been substantially curtailed.
For full report contact OCR.