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A New Era For Chinese Monetary Policy

Mar. 11, 2020 1:20 PM ET2 Comments
Mark DeWeaver, CFA profile picture
Mark DeWeaver, CFA


  • Chinese easing measures have been unimpressive so far.
  • High debt levels rule out massive monetary stimulus.
  • Economic crisis response now a job for propaganda officials and police.

One argument for staying long risk assets despite the coronavirus epidemic is that China may respond to this “black swan” event with a flood of new money, thereby creating a rising tide that will lift all boats. Some have argued that such a stimulus is already underway, pointing to record new lending by the Chinese commercial banks, the central bank’s liquidity injections in the repo market, and reductions to the required reserve ratio (RRR) and the interest rate on its medium-term lending facility (MLF). Yet much of the recent easing is not as impressive as it seems and Beijing has yet to signal a major policy shift.

Consider the 3.34 trillion yuan ($480 billion) lending record set in January, for example. While this appears at first glance to be a sign of dramatically easier credit conditions, in China, January has been the strongest month for new loans as far back as the pre-1978 command economy period. In fact, new lending also set a record in January 2019. This January’s loan growth came in at only 3.3% on a year-on-year basis. (See Figure 1.)

Figure 1. Monthly New Loans

Source: Bloomberg

The central bank’s record injection of 1.2 trillion yuan ($170 billion) through seven- and 14-day repo operations on February 3 was also less than meets the eye. Subtracting the 1.05 trillion yuan in repos maturing on that date, the net amount was a much less remarkable 150 billion yuan. And the latter half of the month saw net open market withdrawals as the 1.2 trillion was not rolled over. The objective was evidently to engineer a smooth post-Chinese New Year resumption of trading in the financial markets rather than to open the monetary floodgates.

January’s 50 basis point reduction in the RRR — the percentage of deposits the commercial banks are required

This article was written by

Mark DeWeaver, CFA profile picture
Mark A. DeWeaver is a 30-year veteran of financial markets and the author of Animal Spirits with Chinese Characteristics: Booms and Busts in the World’s Emerging Economic Giant. For more of his commentary, check out www.markdeweaver.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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