1 Mar 2016
China 50bp RR cut will not help drive growth higher - Rabobank
Michael Every, Head of Financial Markets Research at Rabobank, notes that despite the 50bp RRR cut by China on Monday, the RRR cut will not help drive growth higher, adding that none of these steps will work so long as the monetary transmission mechanism is broken.
Key Quotes
"No sooner had the world media’s attention moved away from the G-20 to Leonardo DiCaprio than the PBoC decided that the promise it had made so firmly in Shanghai – not to devalue its currency – no longer applied."
"As I noted yesterday, it, like all the others present, obviously had its fingers crossed when it made that pledge. So the Oscar for ‘Shortest Time Between Policy Promise and Subsequent U-Turn’ goes to them, despite some fierce competition from the Fed, BoJ, and ECB."
"One can argue that by cutting the reserve requirement ratio (RRR) another 0.50%, effectively allowing the banking sector to increase lending by around USD100bn, the PBoC is acting to support flagging growth. Yet as I pointed out last year with a Laurel and Hardy “My half was at the bottom!” analogy, easing monetary policy like that necessarily means greater downwards pressure on the currency at a time when capital outflows are significant (which we know they are even if some of the relevant PBoC data were recently redacted). Indeed, the need to add liquidity is driven by that same capital outflow, which – ironically – appears to be around USD100bn a month right now."
"But will the RRR cut help drive growth higher? Have any of the previous RRR cuts done the trick? Have any of the rate cuts? Has the surge in new lending of late? The answer to all these questions should be clear: No. None of these steps will work so long as the monetary transmission mechanism is broken."
"In other new normal countries it’s broken as banks don’t want to lend; in China they keep lending too much to borrowers who are already too highly leveraged and loss making."
Key Quotes
"No sooner had the world media’s attention moved away from the G-20 to Leonardo DiCaprio than the PBoC decided that the promise it had made so firmly in Shanghai – not to devalue its currency – no longer applied."
"As I noted yesterday, it, like all the others present, obviously had its fingers crossed when it made that pledge. So the Oscar for ‘Shortest Time Between Policy Promise and Subsequent U-Turn’ goes to them, despite some fierce competition from the Fed, BoJ, and ECB."
"One can argue that by cutting the reserve requirement ratio (RRR) another 0.50%, effectively allowing the banking sector to increase lending by around USD100bn, the PBoC is acting to support flagging growth. Yet as I pointed out last year with a Laurel and Hardy “My half was at the bottom!” analogy, easing monetary policy like that necessarily means greater downwards pressure on the currency at a time when capital outflows are significant (which we know they are even if some of the relevant PBoC data were recently redacted). Indeed, the need to add liquidity is driven by that same capital outflow, which – ironically – appears to be around USD100bn a month right now."
"But will the RRR cut help drive growth higher? Have any of the previous RRR cuts done the trick? Have any of the rate cuts? Has the surge in new lending of late? The answer to all these questions should be clear: No. None of these steps will work so long as the monetary transmission mechanism is broken."
"In other new normal countries it’s broken as banks don’t want to lend; in China they keep lending too much to borrowers who are already too highly leveraged and loss making."